September 26th, 2017

Guest post: BAT executive on disruption of the tobacco industry

BAT’s O’Reilly on the disruption of the tobacco industry

On June 12th, I published a blog, Pariahs, predators or players? The tobacco industry and the end of smoking, in which I tried to guess how tobacco companies are thinking about the future from my vantage point on the sidelines.  But I also asked if any industry figures would like to offer an informed insider’s view and offered a right of reply. Well, to my surprise one executive did reply.  David O’Reilly is BAT’s Group Scientific and R&D Director, and here is his perspective.

Dr David O’Reilly, Group Scientific and R&D Director, British American Tobacco

A few weeks ago I was asked about my views on the upcoming “decade of disruption” for tobacco and nicotine companies. While the questioner was right to suggest that next generation products such as e-cigarettes and Tobacco Heating Products (THPs) will have a colossal impact on our industry – and be transformational for consumers – in reality, the question was probably posed around ten years too late. The industry has already been disrupted and the pace of change is accelerating.

Set against this backdrop, I enjoyed reading Clive Bates’ comprehensive blog post on the current opportunities and challenges facing modern day tobacco and nicotine companies like British American Tobacco (BAT). Of course, there have been discussions on this topic elsewhere, such as at the Global Forum on Nicotine in June where I participated in a panel discussion, “Nicotine futures: the tobacco industry and public health” (YouTube). It’s a broad, relevant and important topic. Below I’ve outlined a few thoughts capturing our current thinking on some of the most salient aspects of these conversations:

1. Motivation

I can’t speak on behalf of the industry, but at BAT our motivations in developing a range of next generation reduced-risk products is clear. We’re a business and so our primary objective has to be commercial. This isn’t – or at least shouldn’t be – controversial or surprising.

That said, we see no dissonance between our commercial objectives and striving for a future where smoking-related disease is a thing of the past. Indeed, given that the vast majority of our consumers also want to see an end to smoking-related disease and our shareholders want to invest in a sustainable business, our increased focus on next generation products makes perfect sense.

We view next-generation products as a win for consumers who might benefit from less-risky products and increased choice, a win for public health where the upside is self-evident and a win for our shareholders as we’re well positioned to further unlock the commercial benefits of the emerging category and take a leading position in the marketplace for these new products.

2. Regulation

At BAT, we’re strong advocates for sound regulation. It’s essential for the continued growth of the category and ultimately paramount for both consumers and for public health. As such, we would like legislators to develop consistent regulation and a fair system of taxation that reflect the relative risks of the products and doesn’t restrict their growth. Poor regulation could easily halt progress in what is still a very nascent category, and so our view is that regulation must be truly consumer-centric:

  • It is crucial for consistent quality and safety standards to be in place. To ensure consumer confidence and a high-level of safety, these standards must be based on robust science and not be arbitrary or ill-informed
  • Marketing and advertising rules must ensure that adult consumers are the only target
  • Regulation can – and should – ensure a high-level of consumer safety and product quality while also enabling appropriate levels of freedom to innovate, market and distribute. Ultimately freedom in these respects will enable the category to grow, which will be better for consumers and better for society.

In reality, we recognise that our primary responsibility is to create winning products based on science that consumers can trust. Our role is to ensure that our next generation products perform well enough to be relevant and viable alternatives to cigarettes.

Future success will require transformative, innovative products and changing the conversation about tobacco harm reduction. Governments will ultimately decide on regulations. We were very encouraged by US Food and Drug Administration’s recent announcement recognizing tobacco harm reduction policies and the continuum of risk for tobacco products. These principles have long been the core of our efforts in leading the transformation of the tobacco industry.

3. More and better choices

While the tobacco and nicotine industry was dominated by one product in the 20th Century, it’s clear to us that the 21st Century will be one of fragmentation. This is no different to the fragmentation that we see in beer, chocolate, coffee – you name it. Why should tobacco and nicotine be any different?

Arguably, this fragmentation is led by consumers. We already see that some consumers smoke, some vape, some prefer THPs, some combine one product with another and so on. Consumers are hungry for more and more, and better and better choices.

The ‘more and more’ is why we’re focused on building a family of brands and product platforms across a range of sub-categories – but the ‘better and better’ is key too. To accelerate the conversion of smokers into ex-smokers, it’s essential that consumers have brands that they can trust. That’s why we’re setting the bar on standards for product safety and quality, based on robust science.

Disruption is already a reality for tobacco and nicotine companies – and it’s only just begun. We are excited about the opportunities this can bring for consumers, society and our business – we don’t fear it and we’re already fully embracing it. I hope that in the future, there will another generation of people who will say that the leaders of the tobacco industry in the early 21st century got it right.

Comments welcome…!

10 comments to Guest post: BAT executive on disruption of the tobacco industry

  • Roberto Sussman

    Indeed, this a very interesting disruptive process, which (as opposed to the disruption from vaping) is announced beforehand by the disrupting agent. As all cultural and political disruptions (from the Renaissance to social media) it produces among the affected a reinforcement and hardening of their orthodoxy: witness the reaction of the WHO and health bodies to that latest PMI funded initiative.

    However, practically all the discussion of the THR based industry disruption of the tobacco economy is centered on its regulatory aspects and potential demographic effects in rich and developed countries. The tobacco industry has a very different modus vivendi and modus operandi in developing and underdeveloped countries.

    First, the tobacco industry in a lot of these countries is an important source of government revenue, is either (partially or totally) state owned and/or has maintained a long time stable status quo political arrangement with governments (which tend to be either authoritarian or very opaque and non accountable).

    Second, as opposed to social perceptions in the English speaking world and in a lot of western democratic countries, the broad society in developing and developed countries does not perceive this industry as such a super rogue and ultra-villain actor as that described by the discourse of tobacco control.

    Third, public health institutions are very centralized vertical structures having a symbiotic relation with the governments: they get state funding and serve as soft power to endorse government policies. Public health institutions are (partially funded) and connected to the pharmaceutical industry and the WHO, which plays a similar role to third world public health bodies as the Central Committee of USSR did towards communist parties in the XX century (or the Vatican towards Catholic church parishes). While Public Health in the UK or Germany or Japan is sufficiently de-centralized to dilute or re-interpret diktats from the WHO, these diktats tend to be cast in stone fatwas for all of public health in India, Malaysia, Brazil, Colombia or Nigeria. The only reason why FTCT rulings may not be so thoroughly implemented in these countries is that law enforcement tends to be (in general) lax.

    The losers of the tobacco industry disruption of the tobacco economy would be the pharmaceutical industry and the public health tobacco control bureaucracies, together with the Soviet Central Committee of the WHO (or the Vatican of the health church). These are the opponents of this disruption. Considering that the tobacco industry could wield in developing countries more political and financial clout to influence governments than in developed countries, and assuming further technological development to make low risk products more price accessible, I wonder if perhaps the tobacco industry disruption may be (at least in the long run) more effective and successful in developing markets than in rich countries.

  • David O'Reilly

    Hi Paul. Thanks for your question. Just about all current vaping products on the market are based on the coil and wick system, which was invented by Prof Hon Lik in China. Our current products also use the coil and wick system, but were developed in our Research & Development laboratories in the UK and the US using third-party technology under our Vype e-cigarette range. We manufacture a range of different devices, both open and closed systems (such as Vype ePen, Vype eBox and Vype eTank Pro), as well as a range of liquids of different flavours and nicotine strengths, including nicotine free. Regardless of the technology, components and ingredients we use, we focus a lot of time and effort on ensuring quality and safety because consumers tell us that the biggest barrier to moving from smoking to vaping for them is the concern about quality and safety, and not just how well a product will satisfy them. If you would like to know more about the products we have, you can find more information on our websites including: Harm Reduction Focus Report. This is a very fast moving category where getting the balance right between innovation and ensuring quality and safety is key. But… watch this space! We plan to move beyond the coil and wick in the very near future with what we hope will be game changing new technology.

    • Paul McNamara

      Thanks for your response David. Looking forward to see something beyond the wick and coil. Sounds exciting!

    • vapingpoint

      The Vype starter stuff available in Supermarkets here in the UK, like the e Stick,the e Pen, the Pebble confine the buyer to having to have refills manufactured by you, to keep them under tight control and in YOUR loop. Also, it is my opinion that they are very poor providers of a ‘good’ vaping experience. You should dump them! It seems that most supermarkets are selling your worst products!

      But the ones that might be a really good offering to smokers coming off smoking, don’t seem to be in the shops. Where are the e Tank, the e Tank Pro and the e Box? I don’t see them offered in every outlet in the UK. They should be everywhere where your cigarettes are!

      Sometimes I see the e Tank – but then there is nothing else on the counter.

      You do a very acceptable e Tank Pro and e Box. Where are they? Hidden on the Vype website!

      My interest in all this, is to offer smokers the very BEST experience of vaping when they see e cigarettes displayed next to their cigarettes as they buy them. Your ‘beginners’stuff is not that. I find that very disappointing. But business wise, it’s a good move to offer poor vaping products at point of cigarette sale if you want people to carry on smoking.

      Respectfully and sincerely.

  • dodderer

    During the debates,lobbying etc that surrounded the new TPD,Clive suggested that there is a “sweet spot” for regulation.In UK, at least,we have 1.5m vaping ex-smokers and approx. 36,000 vaping products have been notified to MHRA.This has been achieved almost wholly under regulation by the General Product Safety Directive – with both PHE and RCP stating that vaping is at least 95% safer than smoking.

    If there are no obvious major problems with the current situation,why would anyone want to change it?

  • Erik Bloomquist

    Below is a link to BAT’s most recent investor presentation focused on NGPs (Next Generation Products) (Nov 2016). There is likely to be more news from them before the end of the year.

    You can see that the products BAT is selling are well past the first gen basic cigalikes of a few years ago. BAT (and some others) have made significant advances in delivering nicotine similarly to cigarettes (pharmacokinetics) and the range of devices are better and better with other sensory and ease of use elements too.

    http://www.bat.com/group/sites/uk__9ztfcm.nsf/vwlivelookupHomePage/HOME?opendocument&QS1=2016

  • Bill Godshall

    As one who has known and respected David O’Reilly since 2010 when I urged him (and executives of all other large tobacco companies) to begin developing and marketing vapor products, I am now more concerned than ever before that the regulatory goals of BAT/Reynolds, PMI/Altria, Imperial and JTI include:

    – banning >99.9% of the 100,000+ vapor products (and other low risk smokefree tobacco/nicotine products) that are now on the market,

    – banning the sale of virtually all new vapor and other smokefree alternatives,

    – obtaining governmental approval (via unwarranted, excessive and extremely costly regulations) to lawfully market their own cigalike e-cig products, and

    – establishing monopolies or small cartels for the vapor and smokefree tobacco/nicotine industries that are controlled by themselves or by several large tobacco companies.

    Here in the US, BAT’s endorsement of many/most FDA tobacco regulations (including FDA’s Deeming Regulation, which would achieve all of the four previously listed policy goals) and BAT’s recent purchase of Reynolds indicate that BAT has adopted most/all of Reynolds’ policy goals.

    Back in 2014, Reynolds submitted a comment to FDA (in support of the Deeming Regulation) urging the agency to ban all open tank vapor systems (by falsely claiming that open tank systems are UNSAFE).

    And since 2014, Reynolds has been actively lobbying states (in the US) to tax e-liquid by the milliliter (instead of as a percentage of wholesale price) because doing so imposes exponentially higher taxes on e-liquid used in open tank systems than on Reynolds’ Vuse cigalike e-cig (and other cigalike e-cigs sold by tobacco companies, which typically contain just 1 ml of e-liquid.

    So while I’m very pleased that David O’Reilly has convinced BAT to develop and market lower risk smokefree alternatives to smokers, the last thing America (or any other country) needs is a regulatory policy that creates a vapor monopoly or oligopoly of one or several large tobacco companies, and that only permits legal sales of several different inferior cigalike e-cig vapor products (that are manufactured by the monopoly or oligopoly).

    If the US FDA approves PMI’s PMTA and MRTP applications for IQOS(that were more than 2 million pages), FDA will basically create a monopoly for PMI and Altria (which would exclusively distribute PMI’s IQOS in the US) for its IQOS, as the Deeming Regulation has already banned the sale of all new vapor products (that weren’t on the market by August 8, 2016) and will (unless changed by the FDA, Congress or the US courts) ban the sale of ALL other vapor products on August 8, 2022.

    By requiring vapor product manufacturers to spend $20+ million to submit PMTA and MRTP applications (that will actually be evaluated by FDA), Obama’s FDA CTP director Mitch Zeller made it very clear that his Deeming Regulation policy goal was/is to ban >99.9% of vapor products and eliminate >99% of vapor manufacturers from America (i.e. and giving the entire legal vapor industry to just one or several large tobacco companies to market just one or several products).

    Unfortunately for public health, consumer choice and free markets, the large tobacco company executives share Zeller’s monopolistic policy goals for the Deeming Regulation (that protects cigarettes from market competition from many different vapor products, but that also would give the entire legal vapor industry to just one or several large tobacco companies).

  • Irish Lass

    Respect to Mr O’Reilly for responding.
    But I am not sure that I ‘buy’ what he is saying. BAT is a company that, like others, is determinedly selling cigarettes to young people in new markets, knowing the harm that they do to health but putting profit first. I felt so outraged by this that I sold my BAT shares many years ago.
    They are a business, first and foremost, and tobacco is still very big business. They may be happy to talk about safer alternatives, even to dabble a foot in developing them – to look caring and to hedge their business bets, – but they continue to add harmful chemicals to their tobacco products. Public health is not a priority for them. Never was and never will be, in my opinion.
    Where is my choice, as a consumer, to buy cigarettes without chemicals that increase their addictiveness as well as the damage that they do to my body? If I am unable to stop smoking, the big tobacco companies are not reducing the harm. My options are the alternatives to tobacco, like vaping, and the tobacco companies have not led – and are adding nothing much of value – in that field.

  • vapingpoint

    I am just using a tobacco company vaping device sent to me to review. Two years ago I also used it – but it is now better. For smokers coming off cigarettes, you can hardly fault it. It feels safe, carefully thought through and everything is good quality and an excellent substitution for smoking. A nice vape, beautifully made, easy to use and obtainable in every grocery store – cheaply.

    This should make other ‘starter’ manufacturers fear that their sales will be threatened by ‘Big Tobacco’. Big Tobacco’s entry into the e cigarette market comes with massive funds to do research, apply for licences, for self promotion, and easy piggy-backing on cigarette sales. They are seen as a threat.

    Vaping is a complex market with new stuff coming out daily and hard to keep up with. There are so many aspects to it, it becomes a complete life-filling hobby. I don’t think Big Tobacco are going to get into that aspect of it, personally. And hobbyists are not going to buy beginners stuff. They are going to continue to build-their-own, mix-their-own unaffected.

    Big Tobacco have sold cigarettes containing ingredients that have verged on the criminal. And sold products concocted to appease the screams of Tobacco Control, that have done more harm than good.They have diverged very far from making cigarettes as they used to be manufactured in the old days, 60 years ago. They have cringed and scraped to ‘please’ Tobacco Control, and now they are doing it again!

    They have just set up The Foundation for a Smoke-Free World. Aaaargh.

    I am personally disappointed that Big Tobacco are talking more like Tobacco Control, who, I consider an evil totalitarian, smoker-torture system, intent on a nefarious end-game.

    Big Tobacco has been unfairly hobbled by shame, persecuted and demonised as a business by anti smokers, public health and,the source,Tobacco Control. It is not true that smokers want to stop smoking – smoking has been a sublime pleasure for millions of people. Big Tobacco have done NOTHING to support their customers – smokers who enjoy smoking.

    It would be good if Big Tobacco made good vaping devices, and made good cigarettes. And if they supported their vapers AND supported their smokers. By support, I mean opposed their persecution and certainly not become part of it!

    To hell with Tobacco Control.

    And to hell with the Foundation for a Smoke-Free World.

    Break free.

    There will be smokers for a long time yet.

  • Paul McNamara

    Thanks David, my question, which follows from my own ignorance in regards to your company and products, is do you have any plans to innovate with electronic cigarettes? So far all I have seen from Tobacco companies is first generation type cigalike products but no real innovation in this market. All the innovation seems to come firstly from the consumers then taken up by the chinese and mass produced for the market But I haven’t seen any innovation from the Tobacco companies in respect to e cigarettes. Do you have any plans for such? If yes, any clues as to what it might look like?

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