E-Cigarettes: An Emergent Threat To Big Tobacco?

The cigarette sector is well known for its cash generation abilities, moderate valuations, and generous dividends. Having survived years of lawsuits and a somewhat diminished demand, the sector still promises some earnings growth and stability.

Although production, consumption and even exports in the US have been on a clear downward path as shown below (source: CDC, "Cigarette Production, Exports, and Domestic Consumption—United States, 1990–2007"), the companies have been able to adapt through price increases, cost cuts, and conquering new external markets.
The sector presents homogenous valuation in terms of Price/Earnings and Dividends, although with somewhat different growth rates, making for a wide dispersion of Price/Earnings/Growth (PEG), falling between the 1.4 awarded to Philip Morris International (PM) and the 3.0 that Reynolds American (RAI) gets.

The sector’s high ROEs are both a function of its stable, highly profitable, nature, and the fact that these companies have repurchased a lot of shares which greatly impacted their book value (this is particularly evident in Philip Morris International).

The threat

Along the years, big tobacco has survived many threats, the two largest being the endless lawsuits due to the health impact cigarettes have, and the lower overall consumption (some of it also coming from the health hazard being much more widely known now).

However, there’s a new threat emerging presently: e-cigarettes and the associated “vaping”. With these new cigarettes, the smoker doesn’t actually smoke – he inhales a vapor mix that includes both a flavor, and nicotine.

PM USA Set to Hike Cigarette Prices Next Week

Cigarettes will get slightly more expensive next week, as tobacco industry insiders report that Philip Morris USA (PM USA) is set to hike the price of its cigarettes by 5 cents a pack across all its brands.

According to Bonnie Herzog, managing director, Beverage, Tobacco & Consumer Research, at Wells Fargo Securities, tobacco industry contacts reported that PM USA is also reducing its off-invoice promotion allowances on L&M to 34 cents a pack (down from 55 cents) through Jan. 28, 2012. She noted this price increase should bode well for R.J Reynolds' Pall Mall brand.

In an e-mail this morning, Herzog wrote that PM USA's list price increase "is encouraging in light of its recent modifications to its controversial MLP (Marlboro Leadership Price) program since this increase will appease most retailers as it allows them to increase their margins."

A spokesman for The Altria Group, the parent company of PM USA, could not be reached for confirmation or comment.

"Overall, this price increase is positive and the industry still does have some pricing power. Given that consumption will likely continue to decline in the mid-single-digit range, pricing is necessary to drive top-line growth," Herzog wrote.

R.J. Reynolds and Lorillard Inc. are expected to follow suit with their own price increases in the coming days, she said. Their hikes are expected to be in line with PM USA's nickel increase.

These increases come five months after the big three tobacco companies raised prices this summer. Lorillard began that round of hikes by raising the price of its Newport Menthol brand by 5 cents a pack and Newport Non-Menthol by 11 cents a pack.

Edinburgh shops in under-age cigarettes fine

Two trained volunteers, aged 16, attempted to buy a packet of cigarettes at various premises across the city.

During these test purchases last month, two convenience stores, in the south west of the city, sold the product illegally to the under-age teenagers.

It is against the law to sell cigarettes to under 18s. The businesses have received a £200 fixed penalty.

If they are caught again they will see an increased fine of £400 and could be stopped from selling cigarettes.

Robert Aldridge, Edinburgh City Council's environment leader, said: "Trading standards officers have been busy visiting shops across the city to remind retailers of their responsibilities when it comes to selling tobacco.

"Retailers generally react well to visits from enforcement officers, and have found their advice useful, but the results of the most recent test purchase exercise are disappointing and highlight the importance of continued action.

"I hope these fines will serve as a stark warning that retailers must abide by the legislation.

"It is important that young people are aware that they will be challenged by responsible shopkeepers if buying cigarettes.

"I would urge the public to contact us with any information about under-age tobacco sales in their neighbourhoods."

Before to the tests, council trading standards officers visit shops and let them know that they will be carrying out checks in the near future and provide information packs on how to comply.

Ex-tobacco employees up for racketeering

Seven former British American Tobacco employees face racketeering charges if National Director of Public Prosecutions Menzi Simelane grants the go-ahead to amend theft charges against them, the Weekend Argus newspaper reported on Saturday.

The former employees, Pienaar van Heerden and his wife, Anthea, John van der Vent, John van Rooy, Phillip Gorden Heynes, Reginald Fisher and Terrence Keyster, appeared briefly in the Cape Town Magistrate's Court on Friday where they are currently charged with stealing more than R6.9 million in cigarette shipments.

When they appeared in court, it emerged that the State was applying to amend the charges to more serious counts of racketeering under the Prevention of Organised Crime Act.

The syndicate’s operations allegedly included the theft of about 590 boxes of cigarettes, mostly Peter Stuyvesant, intercepted while being shipped from the Gauteng plant to the firm’s laboratory in Stellenbosch to undergo quality testing.

Prosecutor Mzukizi Mazandwa asked on Friday that the case be postponed to allow the State to get necessary authorisation from Simelane.

Mike Loftus, who appeared on behalf of three of the accused – the Van Heerden couple and Van der Vent – said the State had already had more than three months to prepare.

Mazandwa then asked that documents seized at the homes of the accused during their arrests be unsealed to allow investigators to peruse and copy them.

The legal representatives for the accused objected to the State’s request.

Loftus described the State’s move to unseal the seized documents as a “blindside”.

He added that he had no objections to a postponement as long as it was marked final.

Magistrate Jasthree Steyn granted the postponement but denied the requests to unseal documents or to amend the bail conditions, saying that the defence did not have any time to receive instructions from their clients.

Obama scolds tobacco firms for fighting new labels

President Barack Obama — pronounced tobacco-free in his latest medical checkup — has tough words for cigarette makers.
Some tobacco companies, he says in a new White House web video, are fighting new cigarette warning labels because "they don't want to be honest about the consequences."
The video, provided to The Associated Press in advance of its release, observes Thursday's 36th "Great American Smokeout" by the American Cancer Society.
Obama says the country has made progress in reducing the number of Americans who smoke but notes that 46 million are still addicted.
"The fact is, quitting smoking is hard," he says. "Believe me, I know."
Obama has fought the habit by chewing nicotine gum, and his last medical report, issued Oct. 31, declared him tobacco-free.
"Tobacco remains the leading cause of preventable early deaths in this country," Obama says in the video. "We also know that the best way to prevent the health problems that come with smoking is to keep young people from starting in the first place."
In 2009, Obama signed legislation to help keep young people from lighting up. In June, the Food and Drug Administration approved new warning labels that companies would have to place on the top half of cigarette packs. Some of the labels are powerfully graphic and include images of a man exhaling cigarette smoke through a tracheotomy hole in his throat, the corpse of a dead smoker, diseased lungs and a smoker wearing an oxygen mask.
Companies led by R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. sued the FDA in August to block the labels, arguing the labels cross the line from fact-based warnings to anti-smoking advocacy. R.J. Reynolds and Lorillard declined to comment on the Obama video. Altria Group Inc., parent company of Marlboro maker Philip Morris USA, is not in the lawsuit.
Earlier this month a federal judge granted a preliminary injunction in the suit, blocking the requirement that would have begun forcing tobacco companies next year to put graphic images on their cigarette packages. U.S. District Judge Richard Leon said it is likely the cigarette makers will succeed in their suit to block the new standard.
"Today, some big tobacco companies are trying to block these labels because they don't want to be honest about the consequences using their products," Obama says. "Unfortunately, this isn't surprising.
"We've always known that the fight to stop smoking in this country won't be easy."

Brain’s Natural Marijuana-Like Chemical Could Lead to New Meds

Researchers have discovered a new way to boost the effects of anandamide — a natural chemical in the body that provides pain relief similar to marijuana.

Anandamide has been called the ‘bliss molecule’ for its similarities to the active ingredient in marijuana. As part of the body’s endocannabinoid system, this neurotransmitter has been shown in studies to offer analgesic, antianxiety and antidepressant effects. It also plays a role in regulating food consumption.

In the study, led by Daniele Piomelli, researchers identified an “escort” protein in brain cells that transports anandamide to sites within the cell where it is broken down by enzymes. They discovered that anandamide’s potency is increased when this protein, called FLAT, is blocked.

Previous work by the researchers suggests that compounds boosting anandamide’s natural abilities could form the basis of pain medications without the side effects of sedation, addiction or other central nervous system problems common with existing painkillers, such as opiates.

“These findings raise hope that the analgesic properties of marijuana can be harnessed for new, safe drugs,” said Piomelli, a professor of pharmacology. “Specific drug compounds we are creating that amplify the actions of natural, marijuana-like chemicals are showing great promise.”

For the study, Piomelli and his colleagues used computational methods to study how FLAT binds with anandamide and escorts it to cell sites to be degraded by fatty acid amide hydrolase (FAAH) enzymes. Blocking FAAH activity increases several effects of anandamide without triggering the “high” of marijuana.

Researchers hypothesize that inhibiting FLAT (FAAH-like anandamide transporters) might be especially useful in controlling certain types of pain.

Specific types of pain that could be helped by this discovery could include pain caused by damage to the central nervous system. It is also thought that it might help people break addiction to drugs such as nicotine and cocaine.

The study appears in the online version of Nature Neuroscience.

The study was conducted by researchers from the University of California, Irvine; Italy’s University of Parma and University of Bologna; and the Italian Institute of Technology.

Sexy pot ads provoke debate over medical marijuana goals

In 2009, as Los Angeles' booming medical marijuana economy inspired an emerald city of weed, Vanessa Sahagun found a business opportunity as "Chacha Vavoom," maven of the 420 Nurses.

Chacha and her "nurses" became a pot culture phenomenon. They savored bong hits on YouTube, modeled skimpy outfits to promote marijuana dispensaries – and stirred young men at medical pot shows teeming with sexual imagery.

"I was proud I was opening up a market creating 'green jobs' for these ladies," said Sahagun, 25.

But now, the sexual marketing of medical marijuana – with racy promotions that often trump the beer industry's swimsuit models – is at the center of an uncomfortable debate in the medicinal cannabis community.

Fifteen years after California voters legalized use of medical marijuana amid images of ailing AIDS and cancer patients, pot dispensaries featuring "bikini budtenders" suggest a different message: pot as a recreational pleasure.

"I've often said how offensive it is that we have naked girls with cannabis leaves or mini-mini-mini-skirts," said Lanette Davies, a Sacramento dispensary operator who condemns others in the industry for marketing sex. "That has nothing to do with medication."

Davies, whose family runs the Canna Care dispensary, said some in the industry "believe there is more money" marketing to recreational marijuana users. "That's not what people voted in. That's not why we're supposed to be here," she said.

Ryan Landers, a Sacramento AIDS patient who leads a medical marijuana policy group called "the Compassionate Coalition," said trade shows featuring "Hot Kush Girl" contests and spicy ads "make my job a hell of a lot harder to convince people what we're doing is true and real."

Most medical marijuana dispensaries refrain from suggestive advertising – and some even feature multiple sclerosis patients or car accident victims who use cannabis for chronic pain.

But the California Organic Collective dispensary in Los Angeles' San Fernando Valley touts bikini-clad counter attendants in ads that depict a buxom nurse holding a red, nipple-shaped stethoscope to her breast.

The Reserve dispensary in Sacramento County employed a model in a metal-studded brassiere and Old West gun belt to promote a super-potent "Green Ribbon" strain packing 25 percent of marijuana's psychoactive tetrahydrocannabinol, or THC.

"They claim to be offering medicine, yet they're using marketing techniques reminiscent of some of the lowest standards of the beer industry," said John Lovell, a lobbyist for the California Narcotics Officers Association.

At the "HempCon" medical marijuana trade show this month in San Jose, the event's own marketing director took exception when she passed a booth for a magazine called Cali Chronic X. It featured seminude models posing suggestively with pot and exotic smoking accessories.

"I don't know why we have to mix marijuana with porn," protested Shawna Webb, a communications professional who uses medical cannabis for pain from a ruptured disk.

Webb said sex is the wrong image for the industry, particularly as California's four U.S. attorneys are targeting pot dispensaries for prosecution and threatening their landlords with property seizures under federal drug laws.
But Jeffrey Peterson, publisher of Cali Chronic X and a performer known as "the 420 comic," said he is making a stand against what he sees as prudish advocates who deny pot's popularity as a recreational drug.

"How dare do these people, who think they represent the cannabis culture, single out the edge of this culture – because we are the cannabis culture," he said.

Near Peterson at the San Jose trade show, Leslie Henck, a Bay Area go-go dancer, wore a bikini as the spokesmodel for a company selling joint-rolling machines. "You don't have to look unhealthy to need medical marijuana," said Henck, 19, who says her recommendation for pot helped her deal with anxiety.

"Sativa Grace," a model for Cali Chronic X, came to the show dressed as a tawdry Alice in Wonderland. Sativa's real name is Andrea Frye. The 21-year-old, who works in an adult novelties store, said she is empowering women.

"Hey, I may have sex appeal," she said, "but I can smoke all day like a guy."

Sahagun, a.k.a. Chacha Vavoom, started 420 Nurses as Los Angeles lit up with neon marijuana leaves from hundreds of new dispensaries. She sold outfits with hot pants sporting green medical marijuana crosses for women seeking pot modeling jobs.

"We went out with our cute uniforms, and I noticed a big response," Sahagun said. "I knew there was a fire there."

She said her "nurses" earn $10 to $25 an hour working in dispensaries or passing out business cards for doctors recommending marijuana – or $100 to $1,000 a day for promotional photos and videos.

At the "Kush Expo Medical Marijuana Show" in Anaheim this month, the 420 Nurses were joined by the Ganja Juice girls and a bikini troupe for an Orange County dispensary sponsoring the Expo's "Hot Kush Girl" contest. A whooping, largely male throng cheered as 21 women competed for signature edition bongs and cash prizes.
"The marijuana industry is male-dominated, and dudes love to look at hot chicks," said Ngaio Bealum, Sacramento publisher of a marijuana lifestyle magazine called West Coast Cannabis.

Bealum, who bills his publication as the "Sunset magazine of weed," said he doesn't run sexually suggestive ads.

And Bic Pho, marketing director for the Yerba Buena Medical Cannabis Club's six San Jose dispensaries, junked ads with bikini models after deciding they projected a bad image for medical marijuana.

"I just didn't feel it was appropriate. So we stopped," he said. Now the dispensaries advertise a damsel, fully clothed, in pirate's attire.

"We went with a pirate theme," Pho said, "just something to remember us by."