Thursday, June 11, 2009

Fitch Ratings Predicts that FDA Legislation Will "Revitalize" the Tobacco Industry: Is This the Best that Our Health Groups Can Do?

Fitch Ratings, a Chicago-based industry and market analysis firm, issued a report yesterday in which it concluded that contrary to the claims of the Campaign for Tobacco-Free Kids and other health groups, the FDA tobacco legislation will "revitalize" the tobacco industry and enable it to more successfully sell its products.

According to the report: "creating a regulatory framework particularly for the introduction new products may revitalize the U.S tobacco industry, where the consumption of its primary product, cigarettes, has been declining for over a decade."

Also according to the report: "'Given that today's tobacco products are grandfathered into the legislation and tobacco products will continue to be sold in retail outlets, we do not expect any significant immediate effects on the sector,' said Christopher Collins, Associate Director at Fitch Ratings. 'However, looking further ahead as more restrictive advertising limits are imposed on all tobacco products, not just cigarettes, the brands with large market share will maintain those shares.'"

The Rest of the Story

This Fitch Ratings report confirms my analysis of the likely effects of the bill and refutes the claim made by the Campaign for Tobacco-Free Kids and other health groups that this legislation is going to harm the tobacco industry by severely reducing youth smoking rates and decreasing the demand for cigarettes.

The legislation will create a perceived FDA seal of approval for cigarettes, which will lead to an increase, not a decrease, in cigarette consumption. If the FDA does lower nicotine levels in cigarettes, that too will increase cigarette consumption because of the phenomenon of compensation (smokers need to smoke more to achieve the same nicotine dose). At the same time, the bill does nothing to reduce youth smoking. No money is put into anti-smoking programs directed at preventing youth smoking. The advertising restrictions are mild, and few will survive Supreme Court scrutiny in the first place. The warning labels will have little or no effect. The disclosure of cigarette ingredients will have absolutely no effect.

The bill will, however, revitalize the tobacco industry by taking away the single factor which is most responsible for impeding the global expansion of the tobacco market: legal liability which will no longer be a significant factor in preventing the introduction and marketing of potentially reduced exposure products (PREPS).

A research report by J.P. Morgan on PREPS (The Third Innovation: Potentially Reduced Exposure Cigarettes, August 25, 2005) provides an insightful analysis of the legal issues that cigarette companies currently face in the development and marketing of PREPS, as well as how those legal issues would be resolved by enactment of the FDA legislation.

The J.P. Morgan analysis concludes that: "Significant US legal risk surrounds PREPS technology. Without FDA regulation, potential future US legal risk is balanced between: 1) failure to make the health benefits of PREPS available to smokers; and 2) making misleading or unproven health claims about PREPS."

In other words, it is the status quo -- specifically, the absence of FDA regulation of tobacco products -- that is actually the limiting factor in the inability or reluctance of tobacco companies to proceed wholeheartedly with the development, introduction, and marketing of PREPS.

This is because of the fear that cigarette companies might face litigation based on claims that they made misleading or unproven health claims about these potentially reduced exposure products. Because it would take years of epidemiologic research after the introduction of these products to provide any meaningful evidence that there is a health benefit from these products compared to existing cigarettes, it is virtually impossible for the cigarette companies to make any health claims regarding PREPS without facing the risk of litigation based on a claim that they are making misleading or unproven health claims.

After all, if they can't prove a health claim until they market and study a cigarette for 10-20 years, and they can't market a PREP until they can prove the health claims, then they are in a complete bind.

But the FDA legislation would bail them out. How? By regulating the introduction and marketing of PREPS, including the conditions regarding the cigarette companies' ability to make various types of health claims, the proposed FDA legislation would preempt any claims against the industry related to PREPS, and would therefore effectively provide immunity for them, allowing them to proceed with the widespread introduction of PREPS into the market, both nationally and internationally.

According to the J.P. Morgan report: "One of the main obstacles facing PREPS today is the industry's inability to clearly and credibly communicate reduced risk attributes to smokers. No agency or body has the authority to assess health claims made by tobacco companies or set standards for what constitutes a reduced risk to smokers. This means that tobacco companies currently trying to communicate low health risk attributes of PREPS do so at significant risk. ...

FDA oversight would imbue PREPS with a regulatory 'stamp of approval' and allow for more explicit comparative health claims with conventional cigarettes. ... In our view, FDA regulation would effectively insulate tobacco companies from any potential PREPS-related liability claims. This is because regulation would shift responsibility from the tobacco companies to the government, which would approve the validity of health claims on PREPS."

It is critical for public health groups to understand that it is the ability to make actual or implied health claims about PREPS that is most important to the industry's incentive to market these products. They can only be marketed effectively based on the industry's ability to communicate to potential customers, at some level, the claim that these products represent an improvement in health risk compared to conventional or existing cigarettes.

So in many ways, the status quo -- the lack of FDA regulation of tobacco products -- is the single thing that is holding up the widespread introduction and marketing of PREPS, and with that, the widespread use of what would have to be, by definition, unproven and undocumented health claims.

I think it is also important for public health groups to understand that the market potential for PREPS is enormous and these products could be disastrous to the public's health by greatly undermining efforts to encourage smokers to quit smoking. Instead, it is very likely that smokers who would otherwise attempt to quit entirely would switch to PREPS because of the belief (true or false) that use of these products would reduce their disease risk (click here for a more detailed discussion of this issue).

In fact, the J.P. Morgan analysis included a survey of smokers which demonstrated that 91% would be willing to try a lower-risk cigarette and 85% would be willing to switch cigarette brands if it would lower their health risk.

The potential impact of PREPS is so profound that J.P. Morgan actually estimated that just a 1% increase in cash flow growth from PREPS would result in a 15% increase in valuation for the two major international cigarette companies viewed as most likely to introduce PREPS - Altria and British American Tobacco (linked to the United States' second leading tobacco company - Reynolds American - through R.J. Reynolds' merger with BAT's Brown & Williamson).

According to the report: "We believe that PREPS could represent the next phase of product innovation, the first in over 30 years. PREPS technology, if applied to existing international brands, looks to us likely to further open up market share gaps between the top two global companies and the rest of the market.

In our opinion, the most important medium-term upside for PREPS is a nation-wide US launch of a PREPS cigarette product under an existing premium brand name; we think this could transform the economics of the global PREPS segment. However, the roadmap to unlocking the market is in the hands of the US Congress, which, to date, has failed to act on the issue of granting the Food & Drug Administration (FDA) regulation over the tobacco industry."

Ironically, it is precisely the lack of FDA regulation of tobacco products that is the only thing holding back the tobacco companies from a huge global market expansion, one that would likely undermine decades of public health campaigns by convincing large numbers of smokers, rightly or wrongly, that their health risks would be lowered by switching to PREPS.

Just as the introduction of "light" cigarettes is believed to have resulted in a large number of smokers switching to these products rather than quitting smoking, the introduction of PREPS would undermine public health efforts to encourage individuals to take the action that would be most beneficial for their health - quitting smoking.

Even more ironically, the key player in the global expansion of the cigarette market, the key facilitator of this expansion which is using every tactic at its disposal to make it all possible, is none other than the Campaign for Tobacco-Free Kids, an alleged public health and anti-smoking group.

There is also little question, I believe, that the proposed FDA legislation would provide tobacco companies with immunity in the area in which they most desire it: the production, marketing, and sale of potentially reduced-exposure products (PREPs). The only thing really holding the major companies back from marketing such products, which could have a devastating effect on the public's health if consumers are misled to believe that these products would be safer but in fact they are not, is the threat of liability claims.

By regulating the introduction and marketing of PREPS, including the conditions regarding the cigarette companies' ability to make various types of health claims, the proposed FDA legislation would effectively preempt any claims against the industry related to PREPS (by taking away the prospect of significant punitive damages and thus deterring such lawsuits), and would therefore effectively provide immunity for them, allowing them to proceed with the widespread introduction of PREPS into the market, both nationally and internationally.

In fact, it is the absence of FDA regulation that is in fact holding up what could be the most devastating expansion of the cigarette market ever, and the first significant expansion of the market in more than 30 years.

Incomplete federal regulation of tobacco products is a disaster for both the public's health and for the opportunity for citizens to pursue justice in this country for damages caused by the nation's deadliest product. Unless federal regulation of tobacco products were to be unfettered, and to be protected from political interference (which the current FDA legislation most certainly does not provide), it is not a good thing, but a bad thing.

How is it that the bill allows companies to market PREPS?

The bill contains a special rule that would allow FDA to approve certain modified risk products that cannot meet the more stringent criteria necessary to market a product as "reduced risk." Such products must only claim to be reducing exposure to, or reducing levels of or being free of a particular constituent. Specifically, such products can be approved if "scientific evidence is not available and, using the best available scientific methods, cannot be made available without conducting long-term epidemiological studies for an application to meet the standards set forth in paragraph (1)." In such cases, the major criterion that must be met is as follows: "the scientific evidence that is available without conducting long-term epidemiological studies demonstrates that a measurable and substantial reduction in morbidity or mortality among individual tobacco users is reasonably likely in subsequent studies."

Thus, Section 901(g)(2)(A) essentially allows products that do not claim to reduce risk but merely claim to reduce exposure to or levels of a particular constituent to be approved by simply showing that a reduction in risk is anticipated in subsequent studies. This is a very weak standard. As long as there is any promising preliminary evidence, one could argue that reduced risk is expected if it were to be studied (this is a far cry from demonstrating reduced risk, especially given the many uncertainties including the actual use of the product by consumers and unintended side effects or consequences).

The effect of 901(g)(2)(A), then, is essentially to allow the approval of reduced exposure products and to allow these products to be marketed as such, even though there is shoddy scientific evidence of any health benefit. This institutionalizes the very problem (unsubstantiated health claims) that health groups supporting this legislation have expressed so much concern about. The fact that the bill does not allow these products to represent themselves as reducing health risk is largely irrelevant, because consumers are going to perceive them as reducing risk. How else would someone interpret a claim of reduced exposure?

Of note, the bill does require that there be testing of consumer perception which shows that as the product is proposed to be labeled and advertised, it will not mislead consumers into thinking that the product reduces health risk. However, there are no restrictions on who must do the consumer testing and what the conditions or protocols must be. It would be relatively easy for a company to do consumer testing in such a way that they obtain the result they want to show. Anyone familiar with survey research, focus group studies, or other types of formative research knows that the way questions are asked and the specific protocols used can shape consumer responses substantially. Similarly, post-market surveillance protocols are left to the companies.

The proposed FDA legislation is thus the worst of both worlds. On the one hand, it allows companies to gain a government sanction to market products under the guise of reduced risk by merely calling their product reduced exposure. On the other hand, it prevents companies from marketing products that may truly be reduced risk products by putting an impossible regulatory burden in the path of such products.

Despite all the rhetoric, the proposed FDA legislation would do nothing to save lives, but would instead ensure that the highest risk products remain firmly entrenched in the marketplace, without any competition from what could be life-saving alternatives. Of course, this lack of effective competition is why Philip Morris adores this legislation.

What it comes down to is protecting the profits of the nation's largest tobacco company at the expense of the public's health. That Philip Morris is lobbying for this legislation makes perfect sense, and it is the company's fiduciary responsibility to do nothing less. That the Campaign for Tobacco-Free Kids and other major anti-smoking groups are joining alongside Philip Morris in promoting this legislation is nothing less than a travesty.

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