Risk Business

Tobacco and c-store industries await FDA's next move.

By
Erik J. Martin, CSP Correspondent

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Cigarettes, cigars and chew aren’t the only nicotine options for convenience store and tobacco shop consumers nowadays.

A cavalry of products is riding up to the barn. Moist snuff such as General snus by Swedish Match; smokeless strips, sticks and mints such as R.J. Reynolds’ Camel Orbs; dissolvable dry snuff brands Ariva and Stonewall by Star Scientific Inc.; and disposable or rechargeable electronic cigarettes such as blu Cigs are being carried by more retailers and growing in popularity among tobacco users.

These products, while varied in size, purpose and package, share a critical trait: None is inhaled. Indeed, among other qualities, they’re free of odor, spit, mess and smoke, and they’re discreet.

And there’s something else they want to share with the public but legally cannot: These products are less harmful than cigarettes and, in some cases, may arguably reduce health risks associated with smoking tobacco, many of these other tobacco products (OTP) companies assert. The Family Smoking Prevention and Tobacco Control Act (FSPTCA) of 2009—the measure that created a new FDA division to regulate most tobacco products—mandates that modified-risk tobacco products (MRTPs) go through a premarket approval process, much like drugs and devices. The FSPCTA also requires that manufacturers provide scientific proof that the marketing of the product will reduce harm to individual users and also benefit the health of the entire population.

Before it can legally advertise and promote its smokeless-tobacco wares as an MRTP, the maker must submit an official MRTP application to the FDA and gain approval. The company also must establish a post-market surveillance program in which it will report to the FDA how a product is being used and communicated as an MRTP.

However, only one known MRTP application—in 2010 for Star Scientific Inc’s Ariva-BDL and Stonewall-BDL dissolvable tobacco lozenges—has been submitted so far. (Curiously, the FDA did not approve or deny the application but notified Star Scientific that these products aren’t subject to FDA jurisdiction this could be a game changer that will accelerate what has been an incremental transition from near cigarette-exclusive to a more balanced c-store backbar and tobacco-shop set. MRTP designation would allow a company to make reduced-risk claims not only in advertisements but also likely at the point of sale and on the package itself.

A Case for Modified Risk

Based on the body of scientific evidence he has reviewed, Nik Modi, tobacco analyst for New York-based UBS, says it’s fair and reasonable that tobacco companies be allowed to promote these products as modified risk. “But there’s so much more debate that needs to be done first,” Modi says. “The evidence is pretty clear that science shows that reduced risk is reduced risk, which is a good thing for public health. But the FDA and the government have other ideas in terms of gateway products and how they’re used. “So there’s a psychographic vs. scientific debate going on right now. And it’s unclear if science alone is going to be enough here.” The burden of proof rests heavily on tobacco companies to demonstrate that the product, as marketed, will substantially improve public health, taking into account its effect on both users and non-users, says Danny McGoldrick, vice president of research for the Campaign for Tobacco-Free Kids, Washington, D.C. For example, assume an MRTP applicant showed that use of the product in question does, in fact, reduce harm to the individual user. If its availability and marketing, however, cause more people to use tobacco and/or fewer people to quit, the cumulative effect on overall public health, he says, would be negative and, thus, the standard for a modifiedrisk claim is not met. McGoldrick, a representative of one of the most influential anti-tobacco groups in the nation, has a view that is important to understand if tobacco suppliers are to successfully counter what is expected to become a politically charged debate. McGoldrick says the regulation’s strong public health standard prevents tobacco companies from engaging in deceptive marketing with no regard for public health. Case in point: past marketing for light and low-tar cigarettes, which convinced millions of smokers to switch rather than quit, despite the fact that the products were just as harmful as regular cigarettes, which the manufacturers were aware of, says McGoldrick.

“Many smokeless products are being marketed as ways for smokers to maintain their nicotine addiction at times and in places in which they cannot smoke. This, too, discourages quitting,” McGoldrick says. “Allowing unsubstantiated reduced-harm claims and marketing with no standards would virtually ensure that this continues.”

Awaiting FDA’s Next Move

The stakes are large for manufacturers aiming for MRTP designations, says Jim Solyst, principal consultant for Environ International Corp., an Arlington Va.- based consultant for Swedish Match. And the FDA’s input can’t come soon enough for an anxious industry.

 “My prediction is that the guidance [to be issued by the FDA in April] will be pretty bare-bones, which would be similar to other guidance that the FDA’s Center for Tobacco Products has issued in the past,” Solyst says. “It’s only a matter of time until a company has the scientific evidence that is sufficient to allow the FDA to permit a designation of modified risk.”

The likelihood that the FDA ultimately loosens restrictions and allows tobacco companies to promote their applicable products as MRTPs is less than 50%, says Modi: “Right now, the odds are against the industry for doing this.” However, he says, “it’s not like the government has never changed their minds.” Modi cites how, in 2009, the 20-year ban on federal funding for needle exchanges in the United States was lifted. Ample evidence shows that needleexchange programs significantly lower HIV infection rates.

A new worry for tobacco businesses is that the Institute of Medicine recently issued a report recommending that companies and other sponsors developing MRTPs should consider enlisting FDAapproved independent third parties to supervise safety and health research on their products. While the FDA may not adopt this recommendation, industry experts are concerned that the road ahead may be rocky for smokeless-tobacco makers eager to make reduced-risk claims to consumers.

Hoping for Good Snus

While smokeless tobacco isn’t harmless, OTP companies point to evidence of reduced risk based on recent scientific research and expert statements. For example, using Swedish-style snus is acknowledged by several independent health experts to be at least 90% less harmful than smoking cigarettes. Also, the Tobacco Advisory Group of the Royal Col- because they are not “tobacco products” as defined by the FSPTCA.) Many other tobacco companies with potential MRTPs are holding back from applying because they’re awaiting further input on this complex issue from the FDA, which must publish guidance or regulations on the scientific evidence required for assessment and ongoing review of MRTPs by this April. Additionally, the agency’s Tobacco Products Scientific Advisory Committee was slated to issue a report on the safety, health and regulation of dissolvable tobacco products in March. (The FDA declined to be interviewed or provide more information for this article.) What’s the big deal about earning MRTP designation? Some believe lege of Physicians in Britain stated in 2002 that the consumption of noncombustible tobacco is 10 to 1,000 times less hazardous than smoking, depending on the product.

“A company like Swedish Match has conducted clinical trials with an oversight body consisting of credible scientists. But we’ll have to wait and see whether that is sufficient for the FDA’s needs,” Solyst says. “It’s very difficult to submit an application until you know what the FDA wants.”

Gerry Roerty, vice president/general counsel for Swedish Match, says the company hopes to submit its MRTP application by the second quarter of this year. Research conducted by Swedish Match indicates that, especially among cigarette consumers, there is an impression that smokeless tobacco carries the same risks as cigarettes, he says; therefore, cigarette users are unwilling to try smokeless tobacco.

“We’re focused on a cigarette smokerfriendly product until such time as we can communicate the health attributes,” says Roerty. “Our research shows that consumers would appreciate having that information. But it’s also important that that information must come not just from our industry, but the health community as well.” General snus are currently available at c-stores in Chicago, Dallas, Philadelphia and a few other select locations.

Retailer Impact

If applicable products eventually are approved as MRTPs, retailers would reap huge benefits, according to Modi.

“It would take a lot of pressure off the retailer to rely solely on cigarettes for margins that continue to contract,” he says. “It gives them a whole new opportunity to grow margins. These products also would not be subject to significant taxation like other tobacco products.”

Consider data provided by SymphonyIRI Group: In the 52 weeks ending May 15, 2011, smokeless tobacco products in c-stores racked up unit sales of 1.1 billion and dollar sales of $4.4 billion—a 10.6% increase from the previous year— making it the fourth fastest-growing category, behind only energy drinks, sports drinks and teas/coffees. Broken down further, spitless tobacco items accounted for more than $167 million in c-store sales over the same period—a nearly 35% increase from the prior year.

As the MRTP category evolves, and if and when reduced-risk claims can be promoted, sales could skyrocket, says Bonnie Herzog, managing director of beverage, tobacco and consumer research for Wells Fargo Securities LLC, New York.

“There will either be switching or dual usage,” she says. “I don’t believe the existing cigarette category will go away—it will evolve, as it has been.”

And that’s where c-stores and tobacco shops can seize new opportunities. As demand increases for smokeless products, retailers should allocate more space to them and drive foot traffic into their stores.

“Think about it in the context of soda beverages and key brands,” Herzog says. “You’ve got to have 2-liter bottles and 12-packs of Coke and Pepsi as core offerings, but you have to have other varieties and offerings once the consumer is in the store.

“It’s important for manufacturers of these new products to get consumers used to these different offerings now so that, down the road when there is a framework from the FDA and modified-risk claims can be made, you’re ready.”

That may sound easier than it is. Contracts from some of the majors places limitations on free space, says Roerty. “There are contracts and other issues that shrink the amount of space available,” he sys. “C-store operators would be wise to accommodate as many of these products as they can.”

Changing Store Sets

If MRTP expands the playing field, analysts see a fresh crop of suddenly vibrant players. “You’ll see the dissolvables and what I call the ‘alternate tobacco’ category really start to look like smokeless tobacco eight years ago,” Modi says, “where all of a sudden they were getting more shelf space, consumers started buying more, and now it’s a legitimate growth driver at convenience stores.

“They’ll have to carve out a whole new section. I think it will be part of the smokeless section, perhaps even taking away from cigarettes, to some degree.”

Modi says that, for tobacco shops, “it would likely accelerate the switching from cigarettes to MRTPs, which will likely carry higher margins due to less excise tax and MSA-associated expenses.”

As a parallel example, Modi cites the 1980s cold vault. “It was basically all black—all you had was cola. Look at it today, and you also have noncarbonated drinks, orange soda, grape soda and energy drinks,” he says. “I don’t think the total tobacco set is going to be any different from that beverage cold box in the future. People will get their nicotine through different means, just like people get their caffeine through different means.” 

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