When one of the world’s biggest tobacco groups claims it wants to “unsmoke the world” it is bound to meet scepticism, so it was no surprise that Philip Morris International’s £1bn swoop on a British company that makes asthma inhalers caused something of a stir.
The New York-listed group, which has a market capitalisation of $155bn, characterised its offer for pharma business Vectura earlier this month as part of its “natural evolution into a broader healthcare and wellness company”. Nonetheless, the UK government has promised to keep an eye on the deal on public interest grounds.
It is one of a string of acquisitions big tobacco companies have made to diversify beyond their traditional business — in products from vapes and e-cigarettes to oral nicotine pouches — but Philip Morris can rightly claim to have taken the lead in broadening its horizons. Since 2008, it has invested $8bn to support its strategy for smoke-free products.
“That’s a very bold move coming from the owner of Marlboro,” Emmanuel Babeau, the group’s chief financial officer, told the Financial Times. “We believe in, and we are going to contribute to, cigarettes being phased out,” he added.
Campaigners, however, question how much an industry that has for decades been accused of dark money lobbying and sponsoring questionable academic studies should be trusted when it says it is interested in health.
“This is not the first time that Philip Morris claims that it cares deeply about the health of its consumers,” said Matt Myers, president of US charity the Campaign for Tobacco-Free Kids.
He acknowledged that the group had gone further than most rivals in promoting the use of lower-risk alternatives but argued that the company was still marketing cigarettes heavily in many medium- and low-income countries, where about 80 per cent of the world’s smokers now live. “Many of these actions are inconsistent with the rhetoric,” he said.
Philip Morris accused organisations such as the Campaign for Tobacco-Free Kids of delaying the transition away from cigarettes by lobbying to prevent the sale of vapes and other alternatives.
Addictive dividend yields
The tobacco industry has faced constant scepticism since evidence emerged decades ago that it had lied to the public about the dangers of smoking.
The global tobacco industry, which according to British American Tobacco is worth roughly $818bn, sells to nearly one in five people on the planet. Meanwhile smoking, including second-hand, kills roughly 8m people a year, according to the World Health Organization. This compares with the about 4.1m recorded Covid-19 deaths to date.
The market is split on the industry’s attractiveness. Many investors stripped tobacco from their portfolios years ago, but others are drawn by the outsized cash flows that an addictive product can generate. Cigarette manufacturers have long been known for their prodigious dividend yields — 5 per cent for Philip Morris, more than 7 per cent for Altria and BAT.
More recently, Philip Morris has sought to widen its appeal by playing into the investor trend for sustainability, with chief executive Jacek Olczak hosting a webcast on the theme last month. He told participants that his company had tied executive pay to its new mission to “unsmoke the world” by phasing out cigarettes. The company has also argued that health-conscious investors would do more good by engaging with tobacco companies than divesting from them.
“I don’t believe philosophically that exclusion has ever resolved any problem,” André Calantzopoulos, Olczak’s predecessor, told the FT last year: “Engagement is the only way to change human behaviour.”
Yet investors continue to move in the opposite direction. ABN Amro decided to stop investing in tobacco stocks in 2018. Ruben Zandvliet, the Dutch bank’s business and human rights adviser, told the FT that exclusion was not its default option when engaging with controversial businesses but “for tobacco we decided it was the only option because the negative impact is so extreme”.
“There is no way to successfully engage, as it would mean forcing them to stop selling tobacco and a complete overhaul of their business model,” he added, calling the Philip Morris bid for Vectura “the most cynical form of vertical integration I could imagine”.
Gail Hurley, adviser on sustainable finance at lobby group Tobacco Free Portfolios, said it was “important to remember that new products like e-cigarettes are not harm-free” even if they are not as harmful as cigarettes.
Zandvliet said the bank had never evaluated the financial impact of its decision, because clients had not asked it do so.
Others have stayed true to decisions to stay away despite the financial forfeit. Calpers, the largest public pension fund in the US, which divested from tobacco in 2000, has stuck with its decision despite a 2018 study showing it has lost out on some $3bn in returns.
Scepticism about a zero-cigarette world
In its pitch for its “beyond nicotine” strategy, Philip Morris has been careful to emphasise to investors that the products it sees replacing cigarettes could be just as profitable, if not more so.
The group made almost a quarter of its $28.7bn in net revenues last year from its reduced-risk portfolio, which includes IQOS, a cigarette-like device that heats, rather than burns, tobacco. That makes it an industry leader: the proportion of sales from less harmful products stands at just over 5 per cent at BAT and below 3 per cent at Imperial Brands.
Philip Morris “commands a much higher price per earnings ratio than anything else in the sector,” observed Rae Maile, analyst at Panmure. “In that respect, investors are voting with their feet.”
“The investment case around IQOS has captured the imagination of investors,” he said, adding that IQOS took time to deliver profits after its launch in 2014 “but this year Philip Morris has upgraded profit guidance . . . and announced a share buyback programme — now we don’t just have a story but also delivery”.
But few other tobacco companies are as positive about the likelihood of a world without cigarettes as Philip Morris, which has said it supports the UK government’s goal of eliminating almost all cigarette smoking by 2030.
Even if today’s market leaders stop selling cigarettes, the sceptics argue, someone else will.
“Hopefully there is a day when we are no longer regarded as the tobacco industry and a tobacco business,” Kingsley Wheaton, chief marketing officer of BAT, told the FT. “Now, the day that BAT sells its last cigarette, will that be the last cigarette sold in the world? I suspect not.”
Japan Tobacco International, which makes Old Holborn tobacco and Camel cigarettes, does not specify the proportion of sales made from non-cigarette products, but said “we see [cigarettes], heated tobacco products and other reduced-risk products coexisting for the foreseeable future”.
Imperial Brands, the London-listed group behind Winston and Davidoff cigarettes, has taken a different approach altogether. In January, its new chief executive Stefan Bomhard announced the group was switching its focus back to cigarettes, arguing it had become “overly focused” on alternatives. Last week, it announced a restructuring at its vaping research facility in Liverpool, putting half the jobs there at risk.
Who will be the new consumers?
The industry’s critics have another worry: its need for new consumers if existing smokers move to cigarette alternatives.
Moira Gilchrist, vice-president of strategic and scientific communications at Philip Morris, asks the same question: “What happens when you run out of all the adult smokers to convert to reduced risk products?”
Her answer lies in the company’s research into CBD, a non-psychoactive extract from cannabis plants, and its recent acquisition of nicotine pouch and lozenge company Fertin Pharma. One avenue would be for Philip Morris to sell products promoting “sleep, energy and calm,” she said.
“I think we are showing the world what our path is after smoke products,” she added: “We take very great care to ensure we’re getting to the right audience.”
Deborah Arnott, chief executive of UK based lobby group Action on Smoking and Health, remains unconvinced that the tobacco industry can successfully move away from nicotine products.
“Philip Morris has put forward this idea that it is all about converting smokers, not addicting new generations,” she said. “But long term, it can only work if you addict new generations.”