Big Tobacco's transition under fire as WHO targets vaping
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[December 14, 2023]
By Emma Rumney
LONDON (Reuters) - Big tobacco firms shifting to new nicotine products,
including Philip Morris International (PMI) and British American
Tobacco, have the most to lose if tobacco alternatives face the same
rules as cigarettes, investors and analysts said.
The World Health Organization on Thursday urged governments to apply
tobacco-style controls to vapes, saying they are getting new users
hooked on nicotine.
That could spell trouble for tobacco companies developing alternative
nicotine products, as tighter restrictions and growing awareness of
health risks squeeze their cigarette businesses.
PMI, the world's largest tobacco company by market value, has led the
shift to smoking alternatives, helping its price-earnings ratio - a key
market gauge of company valuations - rise substantially compared with
rivals.
It also means it has the most to lose if tough regulations extend to
nicotine products more broadly, said Pieter Fourie, manager of Sanlam's
Global High Quality Fund, which holds tobacco stocks.
"Maybe that advantage doesn't remain," he said of PMI's higher
valuation.
The investment case for companies like Imperial Brands would be less
affected by such changes, he added.
Imperial reset its strategy in 2021 to focus on its core tobacco
business, lowering its aspirations for new nicotine products after
missing several sales targets and also losing market share in its core
cigarette division.
FAST SHIFTS UNLIKELY
British American Tobacco is investing heavily in alternative products,
focused on vaping and oral nicotine, and wants 50% of its revenues to
come from these by 2035. PMI's target is two-thirds of net revenues from
"smoke-free" products by 2030.
PMI has poured the vast majority of some $10.5 billion it has invested
in "smoke-free" products into heated tobacco products, where devices
heat up tobacco without burning it, in an attempt to avoid harmful
chemicals produced via combustion.
The WHO's vape recommendations come ahead of a biennial conference for
183 governments party to a global tobacco control treaty, set for next
year, where countries are set to discuss new nicotine products including
vapes and heated tobacco.
The U.N. agency has no authority over national nicotine regulations and
only provides guidance. While the treaty is binding, it's unlikely
governments party to it will adopt new rules on alternatives as part of
the agreement any time soon.
That's because the treaty is developed by consensus, and governments
have very different views on how to approach the new nicotine products.
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People walk past a Vape Shop in central London, Britain April 11,
2023. REUTERS/Maja Smiejkowska/File Photo
Some nations like the United Kingdom
have put vapes at the heart of public health efforts to reduce the
death and disease caused by smoking. Elsewhere, in large markets
like India, vapes and heated tobacco products are banned altogether.
Countries that do adopt WHO guidance voluntarily
tend to do so at different speeds, said Brett Cooper, managing
partner at equity research firm Consumer Edge. That makes fast,
global shifts in regulating new nicotine products unlikely.
Still, any moves towards stricter regulations put tobacco companies
at a disadvantage versus today, Cooper said, while caution from the
WHO makes it harder for them to lobby for more favorable regulations
globally.
REDUCED COMPETITION
Both Cooper and Fourie pointed out that consumer demand for nicotine
is unlikely to fade any time soon.
"Unless you actually make nicotine a banned substance, then these
companies have a future market opportunity," agreed Steve Clayton,
head of equity funds at Hargeaves Lansdown, which holds tobacco
company stocks.
Controlling new nicotine products has also proven difficult in many
nations.
In the United States, manufacturers from China have flooded the
market with illegal flavored vapes in recent years, capitalizing on
poor enforcement after regulators tried to clamp down on
e-cigarettes.
Australia, where vapers need a prescription to obtain
nicotine-containing e-cigarettes, has also struggled with a flood of
illegal products.
That has left tobacco companies competing with an onslaught of
smaller players which often flout the rules.
Clayton and Chris Beckett, head of research at Quilter Cheviot,
another tobacco investor, said that more regulations - with proper
enforcement - could actually give the major tobacco companies an
advantage.
It would raise barriers to entry and reduce competition, helping
tobacco companies replicate the advantages they have with
cigarettes, Beckett said, including the ability to charge high
prices.
"Translate a similar sort of environment from combustible cigarettes
to vaping and heated tobacco, and you end up with incumbent Big
Tobacco having very large market shares and a very profitable
business," Beckett said.
(Reporting by Emma Rumney; Editing by Elaine Hardcastle)
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