Episode Summary
Tobacco stocks are now ESG, with Andrea Sefler, PhD, Director of Research, Broyhill Asset Management
While traditionally excluded by ESG investors, tobacco companies have made great strides over the last few years with the introduction of a wide range of reduced risk products (RRPs).
In this episode we sat down with Andrea Sefler, PhD, Director of Research at Broyhill Asset Management, to discuss the topic. Andrea’s PhD in Organic Chemistry and 15 years of pharma experience comes in handy as she walks us through the risk spectrum, starting with heat-not-burn products, then vapor products, and finally, the various forms of oral nicotine, like tobacco-free nicotine pouches. We cover everything, from absorption and metabolism, to device form-factor considerations.
We then discuss the difference between expressing views as a consumer versus as an investor, how purchasing stock from another shareholder does not really help or hurt a company directly, and why the tobacco industry players are best positioned to reduce tobacco harm.
Listen to this episode on Apple, Spotify, Google
Guest-at-a-Glance
💡 Name: Andrea Sefler, Ph.D.
💡 What she does: She’s the director of Research at Broyhill Asset Management.
💡 Company: Broyhill Asset Management
💡 Noteworthy: Andrea has a Ph.D. in organic chemistry and is an experienced investor in the space.
💡 Where to find Andrea: LinkedIn
Key Insights
⚡ The tobacco industry is constantly innovating. Heated tobacco products are a major innovation on the market. Andrea explains, “There’s not really much they can do anymore to innovate around a cigarette, or manufacturing a cigarette, or distributing a cigarette, or whatever to offset that decline, so all they can do is increase the price, but these HTUs now and heated tobacco products, that is an innovation, and you’ve broken that pack model unit and direct price comparisons to competitors. So now the business model is almost a subscription-based business.”
⚡ The absorption of nicotine differs from product to product. One of the most significant differences between heated tobacco, vapes, and cigarettes is how they’re absorbed. Andrea explains, “I like the logic behind this conversational arc that you’ve set up here. So what we’re doing is moving down the risk spectrum of the nicotine products that are currently on the market. So you’ve got combustible cigarettes and tobacco, and then you’ve got heated tobacco, then you’ve got vaping, and now we’re down at oral nicotine. So what is different now is what we’re talking about is what’s called buckle absorption of nicotine. So absorbing nicotine through your mouth or gum membranes as opposed to through your lungs. That’s very different. And to understand why I’ve got to throw out a couple of concepts around blood circulation and metabolism.”
⚡ Safety improvements are always a good thing. It’s crucial to develop and bring safer features for tobacco users constantly. Andrea says, “Like you, I do believe that most of the time, those best positioned to make meaningful changes in an industry are those that are actively participating in it with products, marketing, distribution, and, more importantly, customers that they’re looking to, and have the incentive to, best serve in the long run. I don’t think avoidance of a thing — that’s not the same as fixing it. The bottom line is that people enjoy the effects of nicotine. Some people like to smoke and have been doing so for millennia, so unless we’re willing to try another run at a prohibition experiment, I think it’s in some ways very irresponsible not to develop and offer safer means for people to consume nicotine that choose to do so.”
Episode Highlights
What’s the Difference Between Cigarettes and Heated Tobacco?
“Like you said, these are equivalent to a cigarette, but instead of lighting them on fire, what you’re doing is heating the tobacco with that device, and that essentially vaporizes whatever chemicals — we call them VOCs or volatile organic compounds — are in the tobacco. So these would be your nicotines, your flavors, your fragrances. That’s a fundamentally different process than burning. So it’s a physical change only. So if you think about boiling water, when you boil water, it’s still water, H2O. That’s what these heated tobacco units are doing. Combustion though, that’s a chemical change, specifically an oxidation process. So, oxidative processes can come with inherent risks for a biological system.”
Heated Tobacco Reduces Exposure to Toxins
“Encountering smoke of any kind can expose you to these free radicals, and your lungs are actually designed to absorb gasses directly into your blood, so inhalation is actually a particular risk. So it makes chemical sense that heating the tobacco as opposed to burning it will generate less of these harmful free radicals. And now, the FDA has seen enough experimental data to be convinced that prudential health reduction in health risk is significant enough to warrant what’s called an RRP label or reduced risk product, so now the companies can put this label on their product.”
Replicating the Smoking Experience Was a Major Hurdle for the Tobacco Industry
“One of the largest technical hurdles that had to be overcome was the speed of that heating. The early devices took 10 to 15 minutes to heat the tobacco. When you think about the smoke break, that’s the whole smoke break, and your tobacco takes that long to heat. Now compare that to lighting a cigarette; you light it immediately, you’re smoking. So it really wasn’t until we progressed semiconductor technology to the point that you could send enough power through a small chip that you could hold and smoke that you really had a chance of replicating that experience to the point where you could convert existing smokers.”
Vaping Is Similar to Heated Tobacco Products
“Vaping is similar to the heated tobacco approach ’cause you’re inhaling a vapor and not a smoke generated from combustion, so now you’re creating that vapor. Instead of creating it from a natural product like tobacco, you’re boiling a synthetic liquid mixture, which as you said, contains nicotine and whatever flavors, fragrances, additives that are included. And these are dissolved in a base liquid, like a glycerin or a polypropylene glycol. A major advantage of this approach is that you can strictly control the composition of that liquid.”
Top quotes:
[25:15] “I would say that these modern oil nicotine products better replicate the experience of smoking or inhalation, nicotine consumption because you’ve kind of cut down that absorption time. So that’s a good thing.”
[28:04] “From an investing standpoint, unless you are participating in an IPO or a direct capital raise when you purchase stock in the secondary market, your capital ultimately goes to the investor selling that stock, not the company itself.”
[28:40] “Most of the time, those best positioned to make meaningful changes in an industry are those actively participating in it.”
Full Transcript
[00:00:00] Andrea Sefler: Like you, I do believe that most of the time, those best position to make meaningful changes in an industry are those that are actively participating in it, with products, marketing, distribution, and more importantly customers that they’re looking and have incentive to best serve in the long run. You know, I don’t think avoidance of a thing, you know, that’s not the same as fixing it. Bottom line is people enjoy the effects of nicotine. Some people like to smoke and have been doing so for millennia, right? So, unless we’re willing to try another run-at-a-prohibition experiment, you know, I think it’s in some ways very irresponsible not to develop and offer safer means for people to consume nicotine that choose to do so.
[00:00:48] Nick Mazing: Hello and welcome. You’re listening to Signals by AlphaSense, and I’m your host, Nick Mazing. Today we have a very interesting topic. It might be somewhat controversial, and that is our tobacco stocks now, ESG. Traditionally tobacco stocks have been excluded by all ESG investors due to negative screening.
[00:01:18] What this means is the exclusion of entire sectors from the investment universe, and I think there is a paradigm shift going on in the case of tobacco. I think it’s a very outdated view because companies like Philip Morris International now have over 30% of their revenue coming from reduced-risk products and will be smoke-free, as they call it in the observable future.
[00:01:40] And to be clear, we’re not endorsing tobacco use, we’re not endorsing nicotine use, even though I think nicotine might be rehabilitated as a substance. I think tobacco companies are best repositioned to reduce tobacco harm, and in interest to full disclosure, both I and our guests from Broyhill Asset Management are long
[00:02:00] Philip Morris. I’m the only person. I’ve been the only person for a number of years. Our guest today, Andrea Sefler, is uniquely qualified to talk about this topic because she has a Ph.D. in organic chemistry and is an experienced investor in the space. She’s also one of my favorite people to talk to. Andrea, welcome, and what can you tell us about yourself and about Broyhill Asset Management?
[00:02:23] Andrea Sefler: Yeah. So, thank you, Nick, both for your kind words and the invite. And I’ll echo your praise by saying I also enjoy our conversational smoke breaks if you will. I’ll also add to yours standard disclosures and say these opinions are my own, not those of my company. Nothing I say should be construed as investing or medical device, advice, et cetera.
[00:02:46] So first, I’ll dispense with the boring self-talk. I am, as you’ve indicated on my second career, I spent 15 years in a research role at a large pharma company, and then I decided to take a break for family reasons. But I’ve always loved investing. And along the way, I passed the CFA exams as kind of a part of a self-educational program.
[00:03:09] I’ve never had business classes or an MBA. So, that was the best way to, most efficient way to obtain an education. And that kind of made it a natural transition to move full-time into the world of finance after my break from pharma. And I actually joined the Broyhill family, first as an investor and then became a full-time employee in 2016.
[00:03:30] So, Broyhill itself, for me, is a kind of a perfect fit as a business, because it’s a hybrid entity that’s kind of transitioned over the years and evolved, much like my own career. So, back in the 1980s, the Broyhill family sold a large international furniture business. Um, so, yes, that’s the Broyhill name that might be on your sofa at home.
[00:03:53] And they created the family office to essentially invest the proceeds of that sale. And we serve as the investment advisor essentially for that family office. Chris Pavese, my boss, mentor colleague, friend, he was hired away from JP Morgan in the wake of the great financial crisis and became, to the family office and became the CIO in 2011.
[00:04:22] And during that time his primary focus has been essentially a proprietary, internally researched, value-based equity strategy. Other asset classes, yes, but that has been his primary focus. And that’s kind of a fancy way to say we do investing the old-fashioned way. So, you know, reading company 10-Ks, 10-Qs, earnings calls, making financial models, looking for things that we think are trading at a discount to what we feel is the intrinsic value.
[00:04:55] You buy that and hold it for five plus three years, looking for that valuation gap that you see to close, right? I would say that 20 years ago, that’s probably 20, 30 years ago, that’s the way almost everybody did investment management. Right? That’s probably not so true these days. You know, you’re, most people are looking at, you know, kind of indexing or algorithmic or quantitative strategies.
[00:05:21] There’s a lot of other ways most people do investing now. But what has kind of actually allowed us to keep that traditional investing approach over the years has been that family office strategy. So, you think about a family office, there’s a, a Tolstoy quote that goes, essentially, “All happy families are alike and unhappy families are all unhappy in their unique way.”
[00:05:49] Right? It’s similar family offices, right? They say if you seen one family office, you’ve seen one family office, they’re all different. But one thing they tend to have in common is a perpetuity time horizon, right? So, you’re looking to manage intergenerational wealth, essentially forever, and that makes it a good fit
[00:06:14] for these traditional long-term value strategies, right? The goals and objectives are very well aligned. So, that structure has allowed us to kind of keep that strategy over the long-term, over the years, um, they created an, an RIA, a registered investment advisor entity, that’s Broyhill Asset Management.
[00:06:33] And that allowed friends, colleagues, and, you know, eventually, outside investors to invest in this strategy via what are called SMAs, which are just standard accounts, standard brokerage accounts at Fidelity, Schwab, wherever, that are managed to that value equity strategy. And as the assets under management, the track record has grown, there’s been additional types of platforms and structures set up.
[00:06:59] So, one is these what are called TAMPs. So, what we do there is we manage a model that is set up according to this strategy. And then, on the other end of that platform,investment advisors can go onto this platform and allocate client money to our strategy if they choose. So, that’s what the TAMP structure is.
[00:07:21] And there’s also private fund structures that kind of accommodate different types of investors that, that might be appropriate for. Right. But, over the years, really what we’re doing is kind of the same value-based and investment strategy. And I’ve really en, I really enjoy working in this dynamic, sort of growing organization, but that also has this long-term commitment to traditional deep research.
[00:07:46] That’s a really good match for the research skills that, the analytical skills I developed during my science days.
[00:07:52] So, that’s our story.
[00:07:54] Nick Mazing: So, let’s start with a review of the reduced-risk products or RRPs because I think they’re key to the paradigm shift, and we’ll talk about a number of them. And many listeners are probably not familiar with all the innovation that is actually going on. So, first, let’s talk about heat-not-burn.
[00:08:11] And I remember trying IQOS, which is the PMI product, at Moscow Airport in, like, 2017. And what it is, it’s a handheld device with a slot for a cigarette-like stick, which is a little bit wider and shorter, and it is heated, not burned. And the, I think the experience is very similar to smoking. I mean, I, I, I did try it back then.
[00:08:37] I’ve also tried the, at a different European airport the, the British American Tobacco equivalent. And, you know, the handling, the, a lot of the rituality around that is, is really preserved, and I guess that taste as well. What do our listeners need to know about the heat-not-burn products?
[00:08:54] Andrea Sefler: Yeah. So, you know, kind of putting my chemist hat on first, right? These products, these heated tobacco products, you know, like you said, they’re a device that you insert, essentially real tobacco packaged into what are called heated tobacco units or HTUs. Like you said, these are equivalent to a cigarette, but instead of lighting them on fire, what you’re doing is heating the tobacco
[00:09:18] with that device. And that essentially vaporizes whatever chemicals, we call them VOCs or volatile organic compounds, are in the tobacco. So, these would be your nicotines, your flavors, your fragrances. That’s a fundamentally different process than burning. So, it’s a physical change only. So, if you think about boiling water, when you boil water, it’s still water, right?
[00:09:43] H2O. That’s what these heated tobacco units are doing. Combustion, though that’s a chemical change, specifically an oxidation process. So, oxidative processes can come with inherent risks for a biological system. So, think about what you hear from various health and medical news about oxidative stress and free radical toxicity.
[00:10:09] So, these oxidative processes, like burning, can create free radicals, and those free radicals can damage tissue and biological systems. So, at the bottom line, any encountering smoke of any kind can expose you to these free radicals. And your lungs are actually designed to absorb gases directly into your blood.
[00:10:32] So, inhalation is actually a particular risk. So, it makes chemical sense that heating the tobacco, as opposed to burning it will generate less of these harmful free radicals. And now, kind of the FDA has seen enough experimental data to be convinced that, that prudential reduction in health risk is significant enough to warrant what’s
[00:10:54] called an RRP label or reduced-risk product. So, now the companies can put this label on their product. So, what you’ve done, essentially, if you’ve reduced or eliminated the risk from the burning process, but you still might have risk from being exposed long-term, whatever those risks might be from nicotine and the other chemicals that are being vaporized in the tobacco.
[00:11:16] You know, we may know or suspect some of these, but it may take time to really sort that out properly. ‘Cause if you think about smoking, so we’ve studied kind of the risk of smoking, but we haven’t done a lot of work really to tease out what’s the burning risk versus the inhalation of the chemicals risk to sort that out.
[00:11:34] So, that’s gonna take time. Some of these things, like, if you think about smoking-related cancer risk that takes decades to develop and nobody’s running, you know, a double-blind, gold standard, controlled clinical trial for decades. You just can’t do that. So, it, what you’re doing is more of a survey type, epidemiological study where you’re, you know, asking people questions and controlling for, these people live in the country, these people, people live in the city and statistical analysis.
[00:12:04] It’s just gonna take time to sort those out. But, in the meantime, what they have is a reduced-risk product label. So, that’s where you get that. So, now if I put my investment research hat on, let me circle back to some of those key points you made about the business realities of, you know, heated tobacco products.
[00:12:25] First of all, like you said, these products have really been in the work for, works for years and actually decades. If you’ve read or watched the, you know, classic story Barbarians at the Gate, um, that is, you know, the classic story of the merger of RJR and Nabisco. And you learn, if you’ve read that, you learn that they’ve been working on those devices from, you know, almost as
[00:12:44] soon as we confirmed the risks of smoking. The problem was, you know, that you noted, right, is what you’re trying to do is adequately replicate the smoking experience for the users, right? And, yes, nicotine is a big part of that ’cause that’s, you know, addictive. But people also find the actions of smoking relaxing.
[00:13:05] People can like the flavors and fragrances. There’s, you know, there’s more to the experience of smoking than just the nicotine. And heating the tobacco does deliver the nicotine and most of the flavors. But one of the largest technical hurdles that had to be overcome was kind of the speed of that heating.
[00:13:23] You know, the early devices, you know, it took 10, 15 minutes to heat the tobacco. When you think about smoke break, that’s the smoke, the whole smoke break, and your tobacco takes that long heat. Now compare that to lighting a cigarette. You lighten immediately, you’re smoking. So, it really wasn’t until we progressed semiconductor technology to the point that you could send enough power through a small chip that you could hold and smoke, that you really had a chance of replicating that experience to the point where you could convert existing smokers to device.
[00:13:55] So, we’ve solved that problem. That’s a business problem that’s been solved. Technical problem. There’s another interesting angle, though, from this business standpoint, is that these heated tobacco devices now have kind of fundamentally changed the unit economics of the business. Okay. So, if you think about combustible cigarettes, they’re sold in standard packs and cartons and companies are really, they’re reliant almost entirely on nothing but price increases
[00:14:25] to offset a secular decline in smoking, so over time less people smoke. That’s just the way it is. And there’s not really much they can do anymore to innovate around a cigarette, or manufacturing a cigarette, or distributing a cigarette, or whatever to offset that decline. So, all they can do is increase the price.
[00:14:43] But these HTUs now and heated tobacco products, that is an innovation, and you’ve broken that pack model unit and, you know, kind of direct price comparisons to competitors. So, now you can kind of think about the business model is more of a, it’s almost a subscription-based business, right? So, the consumer buys a device, and then there’s an ongoing consumable component in those HTUs that provides an ongoing revenue stream to the company.
[00:15:15] But there’s also kind of a stickiness to that, right? Because you’ve bought the device, so you’re gonna kind of be, there’s a switching cost to move to a different device. So, that’s, that’s an interesting thing from a business and investing perspective, right?
[00:15:28] Nick Mazing: Certainly sounds like a razor, razor blade sort of a setup. I’m not going to say, “Yeah, nicotine is a service.” Even though it sounds like it.
[00:15:35] Andrea Sefler: Yeah.
[00:15:35] Nick Mazing: Now, let’s talk about another reduce-risk product and that is nicotine vapor. And probably our listeners know JUUL and Joy Blue that was the large product that then got, became part of RJR, which is now part of British American Tobacco and
[00:15:50] many other brands. So, this is a device which is the reusable, disposable, the size of a pen, maybe larger, that hits a liquid that contains nicotine. So, what do listeners need to know about vaping?
[00:16:02] Andrea Sefler: Yeah. So, vaping is similar to the heated tobacco approach ’cause you’re, you’re inhaling a vapor and not a smoke generated from combustion. But so, now, like you’re creating that vapor instead of creating it from a natural product like tobacco, you’re creating it, you’re boiling a synthetic liquid mixture, which is, as you said, contains nicotine and whatever flavors, fragrances, additives that are included.
[00:16:28] And these are dissolved in a base liquid, like a glycerin or a polypropylene glycol. A major advantage of this approach is that you can strictly control the composition of that liquid. Okay. So, you can dial in exactly whatever concentration of nicotine you want, and you can put whatever additives, you choose, that mixture is what you’ve decided. A natural product like tobacco,
[00:16:56] you could measure the nicotine content in tobacco, but generally, when you measure that sample, you’ve destroyed it, and you’re relying on the tobacco leaf that’s sitting next to it on the lab bench to have the same composition that you might actually make the cigarette on it. So, you don’t really know, and probably every tobacco leaf, the, the other components that are in there, you, you just, there’s no, that strict quality control is missing.
[00:17:22] And I would say that now that the FDA is actually regulating for these products, a lot of what I would call kind of a bathtub gin type risk from kind of having unknown, untested ingredients or poor quality control operators, should get shaken out of the system. Okay. So, what I’m thinking about is, you know, we had some very tragic issues around vaping some years ago.
[00:17:46] The FDA should be able to regulate that risk out of the system. We’ll see where the FDA goes in terms of, you know, kind of the fruity, minty flavors for vaping. You know, these, these flavors probably make a difference in terms of new user adoption. You might be targeting a demographic such as minors that you probably don’t want to.
[00:18:07] I would also say kind of logically from thinking about it, less ingredients might be lower risk. Because you have fewer chemicals in there that you might not be familiar with the long-term inhalation risks of. So, you know, take, like, a banana flavoring, I don’t know that we actually have any data or anybody’s actually inhaled a banana flavoring for 30 years, so we don’t know what that might do.
[00:18:29] So, you know, it might be less risky to not have those in there. But, you know, there is a kind of a thinking about it that would, that kind of devolves it into a product that exists almost solely to deliver nicotine to those who choose to use it as stimulant. Okay. That’s not necessarily a problem.
[00:18:48] The, that kind of a product is not without a precedent. If you think about caffeine, you know, there are many people that really need and want their caffeine. If coffee is their method of choice, they might choose to consume a absolutely terrible cup of coffee out of a vending machine for the sole reason of getting that caffeine hit.
[00:19:08] Or, you know, maybe chugging one of those little five-hour energy shots, right? That’s nothing more than like caffeine powder in a palatable liquid. So, that’s, but it’s, it makes it more of a commodity-type product. And I would say there’s probably, it’s fair to say there’s a different public perception around that kind of product that could have an eventual political and regulatory policy impact.
[00:19:30] So, that, you know, could be a, a lingering risk to think about. But you know, overall, I’d say from a business standpoint, that increased regulatory framework ultimately creates a moat around the companies that are capable of navigating that. So, it’s, there’s a lot of resources and time, money, energy to get through that regulatory framework.
[00:19:56] So, at the end of the day, it shakes out those companies that can’t get through that and eliminates that competition. And I’m sure, as a long-term investor in tobacco, you know what regulation did for the profitability of Altria, Phillip Morris, et cetera over the past decades, right? So, you, one could imagine a similar scenario playing out for vaping, the vaping products that obtain FDA approval.
[00:20:23] Nick Mazing: So, after vaping, the other reduce-risk product category that I want to discuss is oral nicotine. And that form function has been around for a long time, obviously in the United States with moist snuff. But talking brands like Copenhagen and Skoal, you can stop at any gas station outside of a major city,
[00:20:40] you’ll see, you’ll see them behind the counter. There is a much lower risk version, which is the Scandinavian Snus. Brands like General, they came into United States more recently. That’s a Swedish Match product, and Philip Morris is acquiring that and moving away from actual to back, which, what I think is the most interesting type product in oral nicotine, there are very safe products like ZYN and On, these are to describe them in case people haven’t seen them,
[00:21:05] they’re little pouches, like mini tea bags, if you can call it that, with cellulose and nicotine and flavoring. And there have been prior attempts at oral nicotine, like gum, like disposable, and things like that that have flopped, generally speaking. But, specifically, the nicotine pouches have been extremely successful commercially.
[00:21:25] So, what do listeners need to know about oral nicotine?
[00:21:28] Andrea Sefler: Yeah. So, you know, Nick, I like the logic behind this kind of conversational arc that you’ve set up here. Right? Okay. So, what we’re doing is kind of moving down the risk spectrum of the nicotine products that are currently on the market, right? So, you’ve got combustible cigarettes and tobacco, and then you’ve got the heated tobacco, then you’ve got vaping, and now we’re down at oral nicotine, right?
[00:21:53] So, what is different now is what we’re talking about is what’s called buckle absorption of nicotine. Okay? So, absorbing nicotine through your mouth or gum membranes as opposed to through your lungs. That’s very different. And to understand why I gotta throw out a couple of concepts around blood circulation and metabolism.
[00:22:18] Okay? So, our liver and kidneys are there to filter and process waste products, toxins, unfamiliar chemicals, these are called xenobiotics out of our blood, okay? Most of these we ingest through our mouth or further on down our digestive tract, you know, esophagus, stomach, intestines, et cetera. Okay? So, anything that the body absorbs from these sources gets immediately sent to the liver and kidneys, you know, essentially for a gate check.
[00:22:53] The lungs, though, their job is to put oxygen into our blood. So, those are kind of connected upstream of the heart pumping blood out to the rest of the body. So, anything you absorb through your lungs essentially gets one free pass through the body to do whatever it wants to do before it hits the liver and kidneys, and they get to give it that hairy eyeball and go, “Yeah, you’re okay.” Or, “No, you’re outta here.”
[00:23:24] Okay? That doesn’t sound like a big deal, one, one trip through. But it is because these organs are actually really, really good at what they do. So, I think the data behind, like, a nicotine concentration in the blood, one pass through the liver and kidneys can kind of drop nicotine concentration by 30 to 40%.
[00:23:45] Okay? And if I think back to my pharmaceutical days, you know, now we were trying to get a therapeutic agent into the blood to do something positive. You know, we had things that we tried to do that with that one pass through the liver, and it was gone, a hundred percent out of there. So, that’s not so great if you’re actually trying to put something into your bloodstream that you want to stay there to have a therapeutic effect or like nicotine, you want the stimulation effects. But it does give the body a chance to filter out the other ingredients that might have otherwise harmful side effects.
[00:24:21] So, if you think about that banana flavoring, right? Your liver’s got a crack at it. So, inherently, I would say there’s probably a lower risk for an oral absorption route as opposed to an inhaled absorption. Okay? Now, you mentioned gums and lozenges and these sort of products flopping. There could be a number of reasons behind that.
[00:24:46] You know, one of, you know, I think for the most part a lot of the gums and lozenges have been marketed as, um, smoking cessation products, as opposed to, you know, maybe there’s been some attempts at nicotine consumption, actually, but mostly smoking cessation. But I’d say, I’d think that, you know, one of the main difference is the time needed to absorb the nicotine.
[00:25:09] Okay? So, if you do nothing else like these gums and lozenges, it takes 30 to 40 minutes to absorb the nicotine into your bloodstream. So, you know, dissolving it in your mouth, getting it across the tissues in your mouth and then into the bloodstream. So, and you’re chewing your gum, you’re sucking on your logs in 30 to 40 minutes.
[00:25:30] Compare that to the near-instant hit you get from taking a drag on a cigarette. Okay? So, now we’re back to the problem we had with the heated tobacco, right? That lag time. So, we’re now up to 30, 40 minutes versus the 10 to 15 minutes to heat the tobacco. The pouches now, those have kind of various ways to enhance and speed up a delivery of the nicotine.
[00:25:52] You can kind of do this physically by the fibers in the pouches, so you can put something in there to kind of make little microcuts in the gum. And what that does is create a direct route to your blood vessels. So, the, you know, the nicotine doesn’t have to pass through the tissue, it can go right to the blood vessel, so that speeds it up.
[00:26:11] And, or you can put additives in there that help the nicotine get across these tissues and into the bloodstream. So, I would say that these modern oil nicotine products better replicate the experience of smoking or inhalation nicotine consumption, right? Because you’ve kind of cut down that absorption time. So, that’s a good thing. I would say just thinking about these products, there might be a little bit of an optics component to kind of user adoption. Uh, and that’s more kind of a historical, thinking about the historical products you mentioned, you know, chewing tobacco also means spitting tobacco, which, you know, I don’t know that that’s something we do in public polite society anymore.
[00:26:58] The pouches themselves originally had, you know, the, the original pouches have actual nicotine in there and, you know, over time that nicotine can stain your gum and teeth in your mouth. And if you think about that, you can see your mouth, other, in the mirror, and other people can see your mouth. So, you’re very aware of that long-term kind of mechanical damage.
[00:27:25] That’s not to say that, you know, from an inhaled tobacco that damage maybe happened to, to your lungs, and I’m not minimizing that damage. But you don’t see that, right? So, there may be kind of a, a consumer, you know, kind of thought process around that section of the tobacco market that you’re gonna have to kind of overcome that perception in order for these products to, you know, kind of be adopted and replace, you know, the other inhalation nicotine.
[00:27:54] So, that’s just kind of how you think about those modern oral market.
[00:27:59] Nick Mazing: So, we’ve covered in depth, from many angles, the pretty wide portfolio of new and relatively new reduced-risk products that exist. So, now let’s talk about tobacco stocks. And, like I said, I think tobacco stocks are now ESG stocks because they’re best positioned to reduce tobacco harm because of all these new products.
[00:28:25] So, where is that?
[00:28:26] Andrea Sefler: Yeah. So, I guess, to begin with, I would kind of use tobacco as a great case example to illustrate how I think about ESG-type philosophies and really, you know, kind of the best way to express them. So, from a consumer standpoint, it makes perfect logical sense to direct your purchases towards goods and services that of, you know, of course, meet your needs but also are produced and delivered in ways that, you know, might align with your values, whatever those might be.
[00:29:01] In a sense, you could think of it as your consumer duty to vote with your dollars in order to participate in a capitalistic society, right? But from an investing standpoint, I would say, you know, unless you’re participating in an IPO or a direct capital raise, when you purchase stock on the secondary market, your capital ultimately goes to the investor selling that stock, not the company itself.
[00:29:25] So, really, your main way as a shareholder to influence the public company is to actually own the stock in both the proxies. Withholding your capital investment, I would say, you know, unless you’re an absolute whale in the financial industry, you know, it probably has little impact. Okay? And that would be me.
[00:29:46] And I guess like you, I do believe that most of the time those best position to make meaningful changes in an industry are those that are actively participating in it, with products, marketing, distribution, and more importantly, customers that they’re looking and have incentive to serve, to best serve in the long run. You know, I don’t think avoidance of a thing, you know, it’s not, that’s not the same as fixing it. You know, bottom line is people enjoy the effects of nicotine. Some people like to smoke and have been doing so for millennia, right? So, unless we’re willing to try another run-at-a-prohibition experiment, you know, I think it’s in some ways very irresponsible not to develop and offer safer means for people to consume nicotine that choose to do so. You know, admittedly, I, I definitely find the science industry, but, you know, I do think these are real product innovations. And, you know, as an example, I don’t, I don’t think you should be opposed to safety improvements for cars simply because you don’t think people should drive them.
[00:30:55] Right? So, that’s, you know, kind of how I think about it.
[00:30:58] Nick Mazing: Andrea, thank you for joining us.
[00:31:00] Andrea Sefler: Uh, yeah. Thanks again, Nick, uh, and thank you for tolerating my mini chemistry lecture. You know, they’ll be a pop quiz next Friday, so.
[00:31:08] Nick Mazing: Today, we spoke with Andrea Sefler, Ph.D., Resident Skeptic, unofficially, or Director of Research officially at Broyhill Asset Management, about the paradigm shift happening with tobacco and nicotine more broadly. We’ll have all the relevant links in the show notes. My name is Nick Mazing, this is Signals by AlphaSense. You can subscribe to us on all the major platforms.
[00:31:27] Thank you for listening.
