Key takeaways:

  • Heated tobacco products have been marketed as a reduced level of harm compared to conventional cigarettes.
  • The USFDA’s granting of a marketing authorization order to a heated tobacco product as a modified risk tobacco product has caused confusion about the ‘reduced harm / risk’ label.
  • Closer analysis of the ruling shows that the regulatory body has rejected the overall ‘reduced risk’ label.
  • The rejection of the ‘reduced risk’ label is gaining momentum among regulatory bodies and independent product research.

Heated tobacco products: a new generation of tobacco product

The 33rd commemoration of World No Tobacco Day finds Big Tobacco struggling a decline in consumer acceptability of conventional smoking. To prevent it from becoming a heritage industry, tobacco companies have spent significant capital expenditure on developing alternative ways to deliver nicotine to users, ideally with the added benefit of being marketed as a reduced toxicological risk. On the heels of e-cigarettes, the latest iteration of this new generation of products is heated tobacco products (HTPs), a market that is predicted to expand at a compound annual growth rate of more than 22% during 2019-2025. The basis for the ‘reduced risk’ claim for HTPs lies in their operation. Inhalable nicotine is produced by electronically heating processed or loose tobacco leaf, which results in HTPs (allegedly) releasing a lower level of some toxins, as the tobacco is heated to lower temperatures than in conventional cigarettes.

Public Health Dispute: Impact of USFDA Decision

HTPs have been aggressively marketed by industry and pro-tobacco think tanks as ‘safer’, ‘healthier’ alternatives to conventional cigarettes. This message is in direct conflict with the assessment of the WHO Framework Convention on Tobacco Control and research findings of independent academic institutions which show that the products still carry an unacceptable level of harm.

The tobacco industry got a boost in this arena of controversy, but when the US Food and Drug Administration (USFDA) authorized the marketing of Phillip Morris International’s (PMI) IQOS – the most popular HTP worldwide with a global market share of 76% . – as a Amended Risk Tobacco Product (MRTP) by granting an exposure modification order to PMI in July 2020.

The ruling was described as a “historic public health milestone”, and a confirmation of allegations that HTPs “fundamentally differ from cigarettes.” The impact of this finding on the industry’s lobbying activities soon became apparent, with reports from companies using the decision to push public health regulatory regimes to legalize the sale of HTPs. After industry lobbying in reference to the USFDA decision and claiming that HTPs are “a fundamentally different tobacco product compared to cigarettes”, the Philippine House of Representatives approved a bill to regulate the distribution of HTPs with the bill’s primary political sponsor supporting the ‘reduced risk’ label of HTPs. The practical result of these lobbying efforts is the launch of a range of IQOS retail stores in the Philippines, the first significant market penetration of HTPs in Southeast Asia.

What is a modified risk tobacco product (MRTP)?

While the tobacco industry portrays the USFDA ruling as a victory for HTPs, the discussion is more nuanced. The industry could not achieve its intended objective in the USFDA MRTP application, which was to obtain the ‘risk modification’ standard for HTPs.

At this time, it is important to distinguish between the two types of MRTP orders: risk modification and the lower standard exposure modification, which are separate standards in how the USFDA rates ‘modified risk’. To meet the risk modification standard in the United States, a company must prove that its product:

  • significantly reduces damage and the risk of tobacco-related diseases and death; and
  • benefit the health of the population as a whole, taking into account both users and non-smokers.

An ‘exposure change’ standard is met if the tobacco product reduces or eliminates exposure to a list of harmful-or-potentially-harmful chemicals (HPHCs). This standard has been granted to IQOS as the product has been rated to reduce exposure of certain HPHCs to users and those around them. However, the USFDA concluded that IQOS did not reach the ‘risk modification’ threshold, as the product did not significantly reduce harm and risk of disease and death compared to conventional cigarettes. It is noteworthy that the USFDA has explicitly stated that HTPs are not safe or FDA approved, and that the exposure modification orders do not allow tobacco companies to make any reduced or amended risk claims.

Assemble Body of Evidence

A USFDA assessment that HTPs reduce exposure to harmful or potentially harmful substances should not necessarily be considered a vote of confidence. Independent research showed that 56 non-FDA-approved HPHCs were at higher levels in HTP aerosol compared to conventional cigarettes. Worryingly, another independent research report on a brand of HTP showed evidence that its heating function led to the charring of internal parts of the heat stick, which risked exposure to carcinogens.

An evaluation of the preclinical and clinical data provided by PMI on its MRTP application found that acute exposure to aerosol vapors from IQOS did not reduce adverse cardiovascular effects compared to cigarette smoking and that there were no observable differences in pulmonary and immunomodulatory toxicities between the product and conventional cigarettes. This was confirmed by research using animal tests, which showed that exposure to HTP aerosol still impairs cardiovascular function, and the product does not necessarily avoid the adverse cardiovascular effects of conventional smoking. In addition, the data showed a worrying pattern of possible hepatoxicity leading to liver damage, implying that HTPs may have unexpected organ toxicity not associated with cigarettes.

Investor Considerations: Emerging Regulatory Trends

Dr Bronwyn King AO, founder and CEO of Tobacco Free Portfolios, notes that the increase in sustainable finance has led to tobacco-free exclusions being widely accepted by mainstream financial institutions, with more than> US $ 11.7 trillion in combined AUM signed with the Tobacco Free. Financial promise

While the tobacco industry portrays the USFDA ruling as a victory for HTPs, the discussion is more nuanced. The industry could not achieve its intended objective in the USFDA MRTP application, which was to obtain the ‘risk modification’ standard for HTPs.

“When it comes to tobacco and the impact on humanity, we call on financial leaders to focus on the criteria that matter. While shiny ‘sustainability reports’ and shiny marketing campaigns abound, the idea of ​​a ‘sustainable’ tobacco company must be comprehensively rejected. The fact remains that tobacco caused an estimated eight million deaths in 2020 – more than four times the number of deaths due to COVID-19. “

It is likely that national regulatory regimes will not be able to ignore the growing body of evidence raising concerns about HTPs. This reflects an increasing recognition by regulatory regimes of the harm caused by e-cigarettes. Investors should take note of an emerging trend of national regulatory regimes rejecting the ‘reduced risk’ narrative for HTPs.

The Italian Ministry of Health and National Health Institute, for example, stated that it was impossible to recognize the reduction of toxic substances and potential risk reduction of HTPs compared to conventional cigarettes. Referring to the growing body of evidence of adverse health effects of HTPs, the Australia Therapeutic Goods Administration has concluded that there is a significant risk of producing irreversible toxicity, potentially leading to serious, acute or chronic health risks or deaths. Singapore and Mexico have imposed a general ban on the sale of the HTPs, citing their agreement with the WHO concerns and the growing body of evidence on the toxicity of the product. Other countries that have imposed general bans on the production and sale of HTPs are Cambodia, Malta, India, Iran, Laos, Mauritius, Norway, Panama, Thailand, Timor-Leste and Turkmenistan. A movement within Hong Kong’s legislature to ban HTPs continues (despite delays due to the 2019 social unrest and COVID-19), and has already taken effect in a city in Taiwan. This evolving consensus between regulatory authorities and research findings should be of concern to responsible investors, whether motivated by values ​​or by value-at-risk.


By Jayshendra Karunakaren, Analyst, ISS ESG. Yuhan Guo, Junior Analyst, ISS ESG