Where There’s No Smoke, Altria Hopes There’s Fire

FOR years, Altria, home to Philip Morris and its popular Marlboro cigarette brand, was a corporate pariah

marlboro brand

blamed for the deaths of millions of people and sued for hundreds of billions of dollars by attorneys general in every state. After eventually acknowledging, like others in its industry, that cigarette smoking was, indeed, addictive and caused disease, Altria went a step further. It broke from the Big Tobacco pack and began supporting legislation that would ultimately put the company under the regulatory thumb of the Food and Drug Administration.

Altria’s motives for submitting to strict oversight have long been a mystery. Did the company and its executives, who were internally pursuing a strategy of “societal alignment,” suddenly embrace a true partnership on public health? Or was this a case, as its longtime foes and competitors have argued, of Altria seeking to generate good P.R. or lock in its market dominance by cozying up to a regulator that could restrict rivals from marketing new products?

Another possible answer was highlighted this month, as the federal government began fine-tuning aspects of a law that President Obama signed last summer that gives the government sweeping new powers to regulate the production and marketing of tobacco products.

A series of letters that that Altria submitted to the F.D.A. as part of that process argues that the government should, effectively, sign off on the notion that smokeless tobacco products are less harmful than cigarettes — and that Altria and other companies should be allowed to market them as such to consumers.

It is a pivotal and divisive claim. While public health doctors agree that the smokeless products are far less hazardous to individuals than cigarettes, they still have concerns because all tobacco products contain nicotine and carcinogens. They also contend that promoting smokeless products — some in tiny packages in the shape of cigarette packs — would attract new, perhaps younger customers and maintain the addiction for smokers who might otherwise quit. They note that Altria is adding flavorings to its smokeless products that have long been used in candy.

Furthermore, critics say, Altria’s suggestion to the F.D.A. that it be allowed to market its products as less risky is part of an effort to dodge indoor-smoking laws (which are credited with encouraging more smokers to quit) and to encourage smokers to use oral tobacco products as supplements.

“If you look at how they’re marketing smokeless now, they’re marketing for dual use, and to protect the cigarette market, which is their big money maker,” says Stanton A. Glantz, a professor of cardiology and a specialist in tobacco research at the University of California, San Francisco.

UNDER its gregarious chief executive, an occasional smokernamed Michael E. Szymanczyk, Altria is treading carefully when it comes to talking about its business strategies or its relationship with the F.D.A. After its letters to the regulator made headlines this month, the company canceled interviews for this article with top executives at its headquarters in Richmond, Va.

An Altria spokesman says the executives declined to comment because “we don’t want to be perceived as leading the discussion” on the regulatory front.

Brendan J. McCormick, another Altria spokesman, says the company supported the legislation enacted last summer because it believed that the F.D.A. offered the best way to settle the debates about tobacco use and marketing, which have raged for decades. He says the company believes that F.D.A. standards will create more predictability in the industry and a level playing field for competitors.

Moreover, he says, the F.D.A. provides a forum to evaluate products that are potentially less harmful — and if the agency agrees with its argument, the company could market them with a federal imprimatur.

Mr. McCormick says Altria doesn’t agree with criticisms that the new tobacco law and the company’s willingness to work closely with its regulator cement its market dominance. “This is a dynamic industry,” he says.

And Altria is a changing company. It spent $11.7 billion last year to acquire UST, formerly the United States Tobacco Company and home to popular snuff brands like Copenhagen and Skoal.

The merger made Altria the biggest cigarette and chew company in the country, controlling 50 percent of the cigarette market and 55 percent of the smokeless market.

The deal also solved several quandaries facing the company. The biggest was that, after its spinoff of Kraft Foods and the less-regulated, faster-growing Philip Morris International units in recent years, Altria had become a stand-alone domestic cigarette company in a declining industry. Bans on indoor smoking, along with rising federal and state excise taxes, have accelerated a long-term decline in the volume of domestic cigarette sales.

Volumes may be declining, but cigarettes remain Altria’s biggest business by far, accounting for $14.4 billion in revenue in 2009. (Smokeless brought in $1.2 billion.) Cigarette profits are growing thanks to price increases and a customer base of people who haven’t kicked the habit. About 70 percent of the nation’s 46 million smokers say they want to quit, government surveys show, and about 40 percent try every year. But only 2.5 percent succeed, the surveys say. The government estimates that 400,000 Americans die of smoking-related diseases each year.

Critics and public health officials contend that in focusing the F.D.A.’s attention on smokeless products, a much smaller but growing industry, Altria and other tobacco companies are diverting regulators’ attention from the source of the real public health problem: cigarettes.

Consider so-called light cigarettes, which have captured nearly 90 percent of the United States market, based largely, analysts say, on the false perception among consumers that they are safer. (Many studies have shown that smokers inhale those cigarettes more deeply.) While manufacturers are required by the new law to drop words like “light,” low” and “mild” from their labels by this summer, the companies may still be able to use pale blue, green or silver packaging, which critics say signifies the same thing to consumers.

“They’re taking the F.D.A. debate and making it on smokeless rather than ‘light’ cigarettes, which is where the real harm is,” says Gregory N. Connolly, a professor at the Harvard School of Public Health who was head of tobacco control for Massachusetts. “It’s brilliant, in a way.”

WHEN Mr. Szymanczyk joined Philip Morris as head of sales in 1990, the company was No. 2 on Fortune magazine’s list of America’s “most admired” companies. Four years later, it had fallen to No. 204, after taking a bashing in court and in the press.

Mr. Szymanczyk, who started his career selling bar soap at Procter & Gamble, faced a huge clean-up job when he was handed the reins to the domestic cigarette business in 1997.

He grew up in Lansing, Ill., a working-class town not far from the steel mills of Gary, Ind. Physically imposing at 6-foot-8, he attended Indiana University on a basketball scholarship.

He graduated from college in 1971, married and started a job at Procter & Gamble — all in the same week, according to court testimony he provided during the tobacco wars. He is a veteran of those battles. One Christmas, an anti-tobacco choir led by Michael Moore, the documentarian, decorated a tree outside his home with Marlboro boxes.

Shortly after Mr. Szymanczyk was named head of the domestic cigarette business, Philip Morris and other major tobacco companies signed a master settlement agreement with states, which imposed strict restrictions on cigarette marketing and advertising and required the companies to pay $206 billion to state governments over 25 years.

Marlboro Snus is smokefree and comes in flavors. Its packaging looks more like that of cigarettes than chewing tobacco.

The settlement left him facing three major challenges. First, he needed to repair Philip Morris’s badly tarnished image. To address that, the company began acknowledging that cigarettes were harmful, executives pursued the “societal alignment” strategy emphasizing good corporate citizenry, and the parent company eventually rebranded itself as Altria.

Mr. Szymanczyk also needed to maintain the company’s cigarette market share, even though the industry could no longer use mass advertising on billboards and products like hats and T-shirts. So the company focused more on direct mailings, store signs and shelf space.

And, finally, at the most fundamental level, he needed to make the business grow. As for that hurdle, Mr. Szymanczyk initially chased after ways to develop a less-harmful cigarette, but even after years of research little progress has been made on that front.

Then the company headed down the smokeless route, developing its own brand of Marlboro snuff, which was dropped from test marketing after the acquisition of UST. It then worked on several iterations of a spit-free smokeless pouch called snus (rhymes with “loose”) that is placed under the upper lip and has been popular in Sweden.

Last week, Altria told its distributors that Marlboro Snus would move out of test marketing and be available nationwide in March. But some analysts say that there have been very few successful new product introductions in the tobacco industry for decades, suggesting that snus is up against steep odds.

“It’s a pipe dream,” says David Adelman, an analyst at Morgan Stanley, of the prospects for snus.

While Altria tried to buy growth with the UST deal, the merger has been a disappointment so far. Even as the company has cut costs by combining cigarette and snuff sales forces and distribution, Mr. Szymanczyk is struggling to get the financial returns he initially promised in the deal.

Some of this is because UST’s higher-priced premium snuff brands have struggled against aggressive, less-expensive competitors. But a great deal of Altria’s woes have to do with how the UST acquisition was financed. A week after the merger was announced in September 2008, the Wall Street investment bank Lehman Brothers filed for bankruptcy and the banking system clammed up. Altria wound up paying interest rates of as much as 10.2 percent to borrow the $11 billion it needed to get the deal done.

“They needed to raise debt at a bad time in the world,” says Christopher Growe, an analyst at Stifel Nicolaus, the investment bank.

Like other analysts, Mr. Growe says smokeless could be a business with strong potential growth for Altria. “There’s an opportunity that, in the long run, the F.D.A. could treat smokeless tobacco differently than cigarettes,” he says.

That, of course, is exactly what Altria is betting on.

EARLY this month, Mr. Connolly, the Harvard public health professor who is also a dentist and an adviser to the World Health Organization, fired off an e-mail message to 48 leading scientists, doctors and other people who have long tracked the tobacco debate, to alert them to the letters Altria had filed with the F.D.A. The letters have fueled a firestorm over Altria’s position on “reduced-harm products.”

Among other things, Altria wants the F.D.A. to allow it to promote snuff and other smokeless products as being less harmful to their users. An Altria official wrote in one of the letters that the company planned to market its smokeless products “to complement proven prevention and cessation strategies, not to compete with them.”

Big Tobacco’s push with the F.D.A. is setting the stage for more big battles between tobacco companies and public health experts.

On one side are people like Matthew L. Myers, president of Campaign for Tobacco-Free Kids, an advocacy group in Washington, who argues that there is no evidence that smokeless products are effective tools to help people quit smoking. On the contrary, he says, there is “a serious increase in youth smokeless use” with no corresponding evidence of a decrease in smoking. A federal survey last year found smokeless products gaining popularity with 10th and 12th graders.

On the other side of the debate are people like Dr. Joel L. Nitzkin, chairman of a tobacco control task force of the American Association of Public Health Physicians and a consultant in New Orleans. Dr. Nitzkin, who supports the tobacco industry argument on this issue and adds that he has never been paid by the industry, says the new law places unfair burdens on companies like Altria because it makes it too hard for them to promote smokeless products as safer alternatives to cigarettes.

Altria, he said, realizes that there is growth potential and less health risk in smokeless products. “We have to give Altria some credit for doing their homework,” Dr. Nitzkin says.

Altria is making similar appeals to the F.D.A. In its letters, Altria has written that the nation would enjoy “a significant public health benefit” if the government allowed more “truthful information” to be made available to adult consumers of smokeless tobacco — meaning that the company would be allowed to make such claims in its marketing.

One of the letters included a chart showing a range of risks that placed cigarettes on one side of the scale and smokeless products on the other, near pharmaceutical nicotine replacement products and quitting. The letter cited a 2009 report in Tobacco Control, a research journal, by a group of 26 experts inside and outside government who spent two years examining the merits of various arguments about reducing the harm from tobacco. The report recommended, among other things, that the government explore the use of less-harmful tobacco products.

But Mitch Zeller, the public health expert who was co-chairman of that group, accused Altria of misrepresenting the report’s conclusions. The key consensus, said Mr. Zeller, a lawyer who was a top federal official on tobacco issues in the Clinton administration, was that people should be directed to the cleanest and safest form of nicotine delivery. That, he said, is medicinal nicotine products — “not smokeless.”

Mr. McCormick, the Altria spokesman, said that Altria did not misrepresent data from the report and that the company’s letter to the F.D.A. cited the full report in a footnote.

Mr. Zeller says he further believes that the F.D.A. needs to focus on reducing addictive nicotine in cigarettes. “The companies,” he says, “have not wanted us to focus on nicotine.”

The F.D.A. is just starting to dig into all these issues. It is setting up its new Center for Tobacco Products, led by Dr. Lawrence R. Deyton, a longtime Veterans Affairs public health physician who was not involved in the decades of political wrangling over tobacco regulation. The F.D.A. principal deputy commissioner, Dr. Joshua M. Sharfstein, was an aide to Representative Henry A. Waxman, Democrat of California and a critic of the industry, as the legislation was being written.

Dr. Sharfstein, viewed by some as having a closed mind on issues of smokeless tobacco, said in an interview that that perception of him was wrong. “The law provides a path for the approval of those modified-risk tobacco products that are supported by evidence,” he said, in one of his first public statements on regulating tobacco. “We look forward to basing our decisions on the careful evaluation of scientific data and then monitoring the impact of these products on public health.”

Once a new product is introduced, the F.D.A. can require companies to extensively study how it is actually used, after which the agency can review the product further.

ONE early sign of the F.D.A.’s stance on smokeless tobacco could be how it regulates flavored snuff. Flavors have emerged as a huge growth market for smokeless tobacco. In fact, the leading mint-flavored products have 50 percent more menthol flavoring cigarettes, on average, than Tic Tacs, Altoids and other popular candy products, according to research published last month in the journal Food and Chemical Toxicology.

Altria’s Skoal and Husky wintergreen products had eight times as much methyl salicylate flavoring (better known as wintergreen) than Wint-O-Green Life Savers, the research showed.

Flavors account for 56 percent of Altria’s smokeless sales, Mr. Szymanczyk said in a speech last September to analysts and shareholders. And the company sees even more prospects for growth in that market with a new Copenhagen wintergreen product and the introduction of snus products in peppermint and spearmint flavors.

“They’re clearly trying to make the product more palatable and more appealing to a broad audience,” says James F. Pankow, a professor of chemistry and engineering at Portland State University in Oregon who was a researcher involved in preparing the journal report.

That audience, public health experts say, includes children. “The flavors are designed to attract kids,” says Kenneth E. Warner, dean of the University of Michigan School of Public Health and a founding director of its Tobacco Research Network.

Altria says that while it supports all efforts to prevent underage tobacco use, it doesn’t have any research indicating whether such flavors would appeal to young consumers more than the traditional tobacco flavor.

Mr. McCormick says Altria adds such flavorings to smokeless tobacco products in response to market opportunities and to create “products that are meant to address the preferences of adults who are interested in smokeless products.” He says Altria is evaluating findings about mint and wintergreen flavorings and had no immediate comment on them.

Smokeless products are coming under fire in some communities. Last October, local officials in New York City moved to ban sales of fruit-flavored snuff in the city, considering them enticing to children. The ban — which excludes menthol, mint or wintergreen flavors — is supposed to go into effect in late February, but two subsidiaries of Altria have filed a lawsuit in federal court in Manhattan to block the ban, arguing that it is superseded by federal law and F.D.A. regulation. The case is pending.

Critics point to Altria’s marketing for its Marlboro Snus to buttress their argument that the company’s smokeless push with the F.D.A. is intended to keep regulators focused on a less dangerous and less used product while protecting a bigger and more lucrative business: cigarettes.

Ads for snus position it as a convenient alternative when a smoker can’t light up in a public place, something that provides a bridge from the last cigarette to the next. “Whenever smoking isn’t an option, reach for new Marlboro Snus,” states one ad that shows a small foil packet of the product, complete with the Marlboro logo. “The foilpack fits perfectly alongside your smokes.”

A marketing brochure for snus states: “Marlboro when you want it.”

Mr. Connolly, the Harvard public health professor, says Altria’s arguments for smokeless tobacco present a public health threat if either the F.D.A. or the public health experts end up agreeing with them.

“It is worth noting that for every pack of snuss sold in the U.S., about 3,000 packs of lights are sold,” he wrote in his message to public health experts this month. “Maybe we need to better understand our priorities for F.D.A. regulation.”

January 30, 2010

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