Join our community of smart investors
OPINION

Big tobacco and the vapour trail

Big tobacco and the vapour trail
August 28, 2019
Big tobacco and the vapour trail

The country’s leading national public health institute, the Centers for Disease Control and Prevention (CDC), is now in consultation with state health departments about a cluster of pulmonary illnesses associated with vaping or e-cigarette use. As at 22 August, the CDC was looking at 193 potential cases. The institute is working hand in hand with the US Food and Drug Administration (FDA) and state bodies to gather information and provide technical and laboratory assistance. 

It’s early days and Ileana Arias, senior scientific adviser at the CDC, notes that “investigators haven’t identified any product or compound linked to all of the cases”, nor is it clear if these cases have “a common cause or if they are different diseases with similar presentations”.

What’s more, many of the cases recorded thus far have involved the presence of compounds such as THC (tetrahydrocannabinol), the principal psychoactive constituent of cannabis, so the risk could come from a range of chemical inputs. Dr Brian King, deputy director for research translation in the CDC’s Office on Smoking and Health, said “the bottom line is there’s a variety of things in e-cigarette aerosol that could have implications for lung health”, adding that “we do know that e-cigarettes do not emit a harmless aerosol”. 

At any rate, intensifying scrutiny in this area could spell trouble for tobacco companies that have allocated substantial capital to the development and marketing of tobacco heating products (vaping) to compensate for the ongoing decline in conventional cigarette volumes.

Last year, British American Tobacco (BATS) generated £901m in revenues from its ‘next-generation products' (NGPs). Admittedly, that’s out of a grand total of £24.3bn, but it represents a 95 per cent growth rate on the previous year. Other industry heavyweights, such as Philip Morris (US:PM), have developed their own vaping products, so it’s easy to appreciate why an intensifying focus on the potential health risks could stymie these companies’ growth strategies.

Initially touted as a safer alternative to regular cigarettes, or more specifically, as a means of ultimately stopping smoking, vaping is now increasingly being marketed as a lifestyle choice. In other words, it has gone ‘consumer mainstream’. Strolling down your local high street, chances are that at some point you would have been engulfed by the sickly-sweet miasma generated by these products, but you could always console yourself in the knowledge that secondary vaping didn’t represent a threat to your health – now we can’t be so sure.

The investigations being carried out by the CDC, the FDA and other state bodies could also pose a risk to the budding cannabis industry in North America, at least on the recreational front given vaping is a popular way for people to consume both nicotine and cannabis. In the US, 10 states have legalised recreational marijuana use, while Canada has legalised the drug completely for both medicinal and recreational purposes.

Tobacco companies are already eyeing the industry as a means of plugging the gap as traditional products fall out of favour. And none of them want to be last out of the gate. We had an example of their new-found enthusiasm for weed at the tail-end of last year, when US tobacco group Altria (US:MO), which is mulling over a potential merger with Philip Morris, paid around $1.8bn (£0.82bn) for a 45 per cent stake in Cronos Group (Can:CRON), a Toronto-based cannabinoid researcher and marketer. And why not? The global legal marijuana market is expected to be worth $66.3bn by the end of 2025, expanding at an annualised rate of 23.9 per cent, according to new analysis from Grand View Research Inc.

If all this wasn’t enough, there are signs that tobacco companies won’t be able to blithely assume that the structural problems affecting their domestic markets will be offset by continued growth in emerging/frontier markets. The Union Health Ministry of India has reinitiated the process of bringing the country’s smoking laws more into line with the World Health Organization's Framework Convention on Tobacco Control. That’s on top of a recommendation by the Indian Council of Medical Research seeking a “complete ban” on electronic nicotine delivery systems, based on the view that these devices become a gateway to smoking. All this means that investors in big tobacco would be well advised to re-examine their long-term exposure to the sector.