British American Tobacco - Tobacco Reporter

Betting on Weed

BAT has further increased its investments in the cannabis industry.

By Stefanie Rossel

In its endeavor to transform its business, initiated in 2020 under the slogan “A better tomorrow,” BAT is increasingly focusing on the cannabis sector to diversify beyond tobacco and nicotine. Two years after its first venture into the hemp market, the group currently has partial stakes in 13 cannabis startups, more than any other tobacco company, according to Seeking Alpha, a financial services provider.

BAT’s most recent move in this direction is a joint venture with Denver, Colorado-based cannabidiol (CBD) producer Charlotte’s Web Holdings in early April. BAT’s subsidiary AJNA Bio Sciences, a botanical drug development company focused on mental health and neurological disorders, has teamed up with Charlotte’s Web and is contributing $10 million as the joint venture’s initial investor. AJNA was co-founded and is partially owned by its president, Joel Stanley, the former CEO and chairman of Charlotte’s Web, together with other founding members of Charlotte’s Web.

The aim of the cooperation is to develop from propriety Charlotte’s Web hemp genetics a botanical drug targeting a neurological condition and pursue approval by the U.S. Food and Drug Administration. While the joint venture did not disclose the neurological condition, observers suspect that the drug is aimed at the treatment of seizure disorders. Charlotte’s Web is also the name of a hemp strain from which an oil can be made that can be used to treat Dravet syndrome and other epilepsy diseases.

The strain, which contains 17 percent CBD and 0.5 percent of the psychoactive ingredient tetrahydrocannabinol, was bred in 2011 by the Stanley brothers to treat a young girl suffering from a severe form of pediatric epilepsy that did not respond to commonly used anti-epileptic drugs. Encouraged by the patient’s positive response to their CBD oil, the brothers established a nonprofit organization to give seizure patients access to high-quality cannabis with a high CBD content. With their advocacy, they helped change laws and public perceptions relating to plant-based solutions. Nevertheless, their product did not become the first treatment derived from cannabis plants to receive FDA authorization. That honor fell to Epidiolex, which contains only CBD and was approved by the agency in 2018.

The joint venture, in which BAT holds a 20 percent stake and Charlotte’s Web and AJNA have a 40 percent stake each, will be led by representatives of all three companies. Its clinical and regulatory strategy will be led by Orrin Devinsky, who was a principal investor in the FDA approval of Epidiolex. Apart from being AJNA’s chief medical advisor, he is also the director of New York City University Langone’s Comprehensive Epilepsy Center. The joint venture wants to file an investigational new drug application and commence phase I clinical development in 2023.

In November 2022, BAT paid £48.2 million ($60.36 million) for a 19.9 percent stake in Charlotte’s Web, a leading company in hemp extract products and the only publicly traded CBD B Corp-certified company. According to its latest financial reports, Charlotte’s Web generated revenues of $74.13 million in 2022.

In mid-March, a major shareholder urged BAT to move its primary stock market listing from London to New York. About 60 percent of BAT’s profits come from the U.S. while only 1 percent is generated in the U.K. With a move to the U.S., analysts argued, the FTSE 100-listed company would not only gain an investor base with greater appreciation of reduced-risk products but also be better equipped if it wanted to venture into the cannabis markets. U.K. law prohibits a company from listing if its profits are sourced from recreational cannabis, even if they are earned in a jurisdiction where marijuana is legal. Although similar restrictions currently exist in the U.S., analysts expect these issues to be addressed in the near future.

With its recent investments, BAT continues its exploration of the cannabis business, which started in March 2021, when it acquired a minority stake in Organigram Holdings of Canada for CAD221 million ($175 million at the time). Canada legalized cannabis in October 2018. Through a number of acquisitions and organic growth, Organigram has since become the second-largest licensed cannabis producer in Canada.

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

May 1, 2023

BAT Settles Investigation

BAT has reached an agreement with the U.S. Department of Justice (DOJ) and the Office of Foreign Assets Control (OFAC) to resolve investigations into suspicions of sanctions breaches concerning business activities relating to the Democratic People’s Republic of Korea between 2007 and 2017.

BAT has entered into a deferred prosecution agreement with the DOJ and a civil settlement agreement with the OFAC, and an indirect BAT subsidiary in Singapore has entered into a plea agreement with the DOJ. The total amount payable to the U.S. authorities is $635.24 million plus interest.

Under the agreement, BAT cannot comment on the documentation published by the investigating authorities or on related factual matters.

As announced in its half-year report of 27 July 2022, BAT recognized a provision of £450 million ($540 million) in line with the International Accounting Standards 37 requirements. its full year 2023 group guidance is unaffected by this announcement.

“On behalf of BAT, we deeply regret the misconduct arising from historical business activities that led to these settlements and acknowledge that we fell short of the highest standards rightly expected of us,” said BAT CEO Jack Bowles in a statement.”

“Adhering to rigorous compliance and ethics standards has been, and remains, a top priority for BAT. In recent years, we have transformed our compliance and ethics program, which encompasses sanctions, anti-bribery, anti-corruption and anti-money laundering. The significant steps already taken, as well as the continued refinements to the program that will be made as part of these settlements, will leave us even better equipped to lead a responsible and sustainable business.”

April 26, 2023

Court Rejects Challenge to PMI Heating Patents

The High Court of Justice in London ruled April 17 that Philip Morris Products’ (PMP) patents protecting a tobacco-heating technology are valid, reports Law360. The ruling represents a defeat for BAT and its Nicoventures subsidiary, which had sought to revoke PMP’s patents.

While considering the patent valid, the court also said that BAT’s Glo heated-tobacco products did not infringe the patents, heading off an infringement counterclaim filed by PMP.

The April 17 ruling is the latest chapter in an ongoing intellectual property dispute between the tobacco giants.

PMP initially sued BAT and Nicoventures, claiming they infringed several of its tobacco-heating technology patents. This prompted BAT and Nicoventures to file counterclaims seeking to invalidate the patents.

The proceedings have now branched off into several different actions before the High Court.

In the current case, Nicoventures argued, among other things, that the PMP technology was obvious in light of a 1998 patent application referred to as “Pienemann,” which covers a “system for providing an inhalable aerosol.”

While Pienemann, like PMP’s technology, has multiple heating elements, Judge Michael Tappin said that a skilled team would consider the multiple heaters to “mimic” one heater. Pienemann also did not specify the inclusion of a thin-film heater as seen in the PMP patent, instead describing a “graphite loaded sheath,” according to the judgment.

Regarding the infringement claim, Tappin said that BAT’s Glo products did not infringe the patents because they did not include a method of allowing different parts of the heating system to be heated at different times.

April 19, 2023

BAT Chair Lauds Progress in 2022

BAT made great progress against its strategy in 2022 despite a challenging external environment, according to chairman Luc Jobin.

Speaking at the company’s annual general meeting on April 19, Jobin noted that BAT’s new category business delivered strong volume, revenue and market share growth. The group, he said, delivered a 150 basis points improvement in adjusted operating margin at current rates and delivered another year of 100 percent operating cash conversion. “We also returned £6.9 billion ($8.57 billion) to shareholders through dividends and share buybacks,” said Jobin in a statement.

Around 15 percent of BAT’s revenue is now generated from noncombustible products, a twofold increase since 2018, according to Jobin. “At the end of 2022, we had 22.5 million consumers of our noncombustible products,” he said. “The upward trajectory, and the momentum we have, provides a clear pathway to reaching our goal of 50 million consumers by 2030.”

While expressing satisfaction with the progress BAT had made in transitioning smokers toward less harmful nicotine products, Jobin noted that BAT could not reduce the health impact of its business by itself.

“Policymakers, regulators and public health advocates must help build the science base and create the policy frameworks necessary for adult smokers to switch to less risky alternatives,” he said.

“As a board, it is our responsibility to make sure that BAT’s own transformation continues apace.”

April 19, 2023

Glo Hyper Under Scrutiny

Italian regulators are investigating BAT and Amazon for potentially misleading advertising for the Glo Hyper X2 tobacco-heating product, reports Reuters.

According to the Italian Competition Authority, the companies have made it insufficiently clear to consumers that Glo Hyper X2 is a nicotine-based product and that it is intended for an adult audience. The agency also said it had seen the product being marketed as “nicotine-free.”

“The omission and/or deceptiveness of this essential information” in advertising could influence consumers’ decisions and expose them, “minors in particular,” to the risk of unknowingly damaging their health, the Competition Authority said.

A spokesperson for BAT said the company was committed to responsible marketing in addition to the requirements set by local applicable laws.

“We are available to cooperate with the Italian Competition Authority to ensure a swift conclusion of these proceedings,” the spokesperson added.

April 18, 2023

Illegal Levels of Liquid in U.K. Disposables

Nearly all major disposable vaping brands on the U.K. market that are not produced by a major tobacco manufacturer contain illegal levels of e-liquid, reports Better Retailing, citing BAT testing data shared by senior wholesale sources.

In a letter sent to wholesalers seen by Better Retailing, BAT said it had commissioned an independent accredited laboratory to test Elf Bar 600 products purchased from supermarkets and independent retailers between Sept. 6, 2021, and March 7, 2023.

The evidence reportedly revealed that the tested products contained significantly more than the U.K. legal limit of 2 mL of nicotine-containing e-liquid from 2.76 mL to 3.88 mL, with an average overfill of 58 percent.

Tests performed on Lost Mary, Found Mary, IVG Bar, Klik Klak, SKE Crystal, Smok Mbar Pro and Solo disposable vapes also showed illegal levels of e-liquid, according to the report.

Together, the brands account for nearly all disposable vaping sales in independent shops by both revenue and volume.

Senior wholesale sources welcomed BAT’s efforts to “clean up” the disposable vaping market but also challenged the claims made, stating they would wait on independent testing and regulatory guidance before taking action. The sources noted that BAT would likely see its market share of the disposable vaping market increase significantly if regulators took action against its rivals.

BAT stated that the results of tests have been shared with the Medicines and Healthcare products Regulatory Authority.

March 20, 2023

BAT Urged to List in New York

GQG Partners is pressuring BAT to move its primary listing to New York, according to the Financial Times. The shareholder reportedly believes it “makes no sense” for the cigarette manufacturer to remain on the U.K. stock market.

A BAT spokesperson said that the company does not comment on engagement with shareholders when contacted by Reuters while GQG did not respond to a request for comment on the report.

March 16, 2023

BAT Restructures its Operations

British American Tobacco is restructuring its operations to streamline and accelerate the transformation of its business. The new structure will feature fewer but larger business units to improve collaboration and speed up decisionmaking.

“As our transformation journey towards our strategic milestones gathers pace, we need to further sharpen our operating model, streamline our business to drive agility, and continue to enhance organizational capabilities,” said BAT CEO Jack Bowles in a statement.

“As part of our commitment to building ‘A Better Tomorrow,’ the changes we have announced today will drive increased focus, accelerate our transformation and fuel growth as we strengthen the foundations of our future as a category-led enterprise.”

BAT will reduce the number of regions from four to three, and the number of business units from 16 to 12, while also accelerating its market exit plans. After the restructuring, the company will have the following regions: USA (Reynolds American Inc.), Americas & Europe (AME), and Asia Pacific, Middle East & Africa (APMEA)

In addition, two new management board roles will be created in order to ensure clarity of ownership, accountability and focus: chief transformation officer and director, combustibles.

The chief transformation officer will be responsible for driving faster transformation, accelerating greater capability build in key areas and enabling an even faster, simpler and more agile organization. The director, combustibles will lead the focus on driving value from combustibles to fuel further investment in new categories.

The changes we have announced today will drive increased focus, accelerate our transformation and fuel growth as we strengthen the foundations of our future as a category-led enterprise.

Jack Bowles, CEO, BAT

The following structural changes and appointments will take effect April 1, 2023:

Johan Vandermeulen, currently regional director, Europe, will be appointed to the new role of chief transformation officer
Luciano Comin will be appointed to the new role of director, combustibles
Frederico (Fred) Monteiro will be promoted to the management board as regional director, AME
Guy Meldrum will continue to lead BAT’s largest business in the USA as president, Reynolds American Inc.
Michael Dijanosic will take on an expanded role as regional director, APMEA
Javed Iqbal, director, digital and information, will work with the regional directors and chief transformation officer to ensure that the digital and information agenda is fully aligned with BAT’s corporate transformation

The president of Reynolds American Inc. and regional directors for AME and APMEA, and the director, digital & information, will report to the chief transformation officer. The director, combustibles will report to the chief growth officer.

Vandermeulen joined the management board in 2014 and has extensive leadership experience across BAT, previously leading the Asia Pacific and Africa & Middle East regions, following general and marketing management roles in Russia, Turkey and as a global brand director. Vandermeulen will report to Bowles.

Comin was regional director, Americas & Sub-Saharan Africa, prior to which he held senior general and marketing management positions in Europe, Mexico and Malaysia.

Monteiro has spent more than 20 years with BAT, most recently as area director of central Europe south, based in Romania. Prior to this role, Monteiro has held numerous senior leadership positions including marketing director, next generation products; head of marketing for the Europe Region and general manager, BAT Japan.

Further, David O’Reilly, director, research and science, will step down from the management board on Feb. 28, 2023, and leave BAT with effect May 31, 2023, to pursue other interests.

O’Reilly joined the management board in January 2012, and has been instrumental, both internally and externally, in driving the science agenda that has underpinned BAT’s transformation.

O’Reilly will be succeeded by James Murphy, currently executive vice president of scientific research and development at Reynolds American Inc.

Murphy has been with BAT for over 17 years and has held a number of senior roles in the center in R&D, operations and marketing as well as in the Americas and Sub-Saharan Africa region. Murphy will join the management board as the director, research and science designate, with effect from Feb. 1, 2023, before assuming the role of director, research and science, reporting to the CEO, on March 1, 2023.

January 31, 2023

Reynolds to Appeal Menthol MDOs

BAT will appeal the U.S. Food and Drug Administration’s marketing denial orders for its Vuse Vibe Tank Menthol 3.0 percent and Vuse Ciro Cartridge Menthol 1.5 percent, the company announced in a statement.

On Jan. 24, the FDA denied marketing applications for two menthol refills used in Vuse Vibe and Vuse Ciro vaporizers, which are sold in the U.S. by BAT subsidiary R.J. Reynolds. According to the agency, Reynolds’ applications presented insufficient evidence to show that the potential benefit to adult smokers outweighs the risks of youth initiation and use.

“Reynolds intends to seek a stay of enforcement immediately and will pursue other appropriate avenues to allow Vuse to continue offering its innovative products to adult nicotine consumers age 21-plus without interruption,” the company said.

“We believe that menthol vapor products are critical to helping adult smokers migrate away from combustible cigarettes. FDA’s decision, if allowed to go into effect, will harm, not benefit, public health.

“We remain confident in the quality of all of Reynolds’ applications, and we believe that there is ample evidence for FDA to determine that the marketing of these products is appropriate for the protection of public health.”

Anti-tobacco campaigners countered that menthol e-cigarettes appeal to underage consumers. “Existing evidence demonstrates that nontobacco-flavored e-cigarettes, including menthol flavored e-cigarettes, have a known and substantial risk with regard to youth appeal, uptake and use; in contrast, data indicate tobacco-flavored e-cigarettes do not have the same appeal to youth and therefore do not pose the same degree of risk,” said Matthew L. Myers, president of the Campaign for Tobacco-Free Kids, in a statement.

Morgan Stanley said it expected the rejected products to remain on the U.S. market for the duration of BAT’s appeal, with minimal impact on the company’s operations. “Longer term, should today’s denial order reflect a broader effort by the FDA to ban menthol e-cigarettes, BAT’s U.S. cigarette business could benefit given its menthol mix as it might discourage some smokers from quitting or switching to reduced-risk products,” the bank wrote in a note to investors. Reynolds’ Newport brand represents about 40 percent of BAT’s U.S. cigarette dollar sales, according to Morgan Stanley.

The Jan. 24 rejection of the Vuse refills underscores the FDA’s ongoing reluctance to approve menthol e-cigarette flavors. To date, the agency has approved only tobacco-flavored e-cigarettes.

However, the FDA has granted both a premarket tobacco product application and modified-risk tobacco product designation to IQOS’ menthol variant, which may eventually leave Philip Morris International’s heat-not-burn product as one of the few menthol reduced-risk alternatives on the market.

The FDA is targeting publishing a final rule to ban menthol cigarettes in August 2023, but considering expected industry litigation, final implementation could be five to six years away, according to Morgan Stanley.

January 25, 2023

BAT South Africa to Restructure Operations

BAT is looking to restructure its South African business following a drop in legal cigarette sales. The process may affect 200 jobs.

The cigarette maker attributed its predicament in part to the five-month cigarette sales ban that South Africa implemented in 2020. Intended to help prevent the spread of Covid-19, the measure was later declared unconstitutional by country’s Supreme Court.

By then, however, the damage had been done, according to BAT.

“The 2020 tobacco sales ban resulted in an explosion of growth for the illicit market. This has continued even after the ban on tobacco sales was lifted,” the company said in a statement.

In 2019, BAT South Africa permanently employed around 1,800 staff across its South African operations. Since 2020, it has been forced to retrench more than 30 percent of its workforce, the company said.

Over the same period, the company’s cigarette sales dropped by around 40 percent as the illicit market accelerated, it said.

Based on independent studies, BAT South Africa estimates that the illicit cigarette trade accounts for up to 70 percent of South Africa’s total cigarette market. This illegal trade has severely impacted the sustainability of the legal tobacco industry and is a source of funds for criminal organizations in South Africa,” BAT wrote.

The company urged for stronger enforcement and new policies to combat the illicit trade.

“While BAT South Africa applauds recent efforts by the South African Revenue Service (SARS) and law enforcement agencies to clamp down on the illicit cigarette market, it also calls for even stronger action, given that the current approach has not stopped the growth of illicit cigarettes.

“SARS has issued important new policies, but now it is time to audit manufacturer policy compliance. To support law enforcement agencies and increase their effectiveness, as well as help consumers differentiate between illicit and legal market offers, a minimum retail price policy is required.

“The illicit trade robs South Africa of billions of rands in much-needed tax revenue, and the impact of this is now clearly being seen on legitimate businesses, their operations, and, unfortunately, the livelihoods of those in their value chains. Legitimate businesses cannot operate competitively if the country’s laws are not enforced.”

BAT did not give details of how it would restructure its business or which jobs might be cut.

January 16, 2023

Tag: British American Tobacco

BAT has further increased its investments in the cannabis industry.