Ashes to Ashes (146 page)

When FDA Commissioner Kessler later appeared before the Waxman House subcommittee in spring 1994 to elaborate on his letter to the Coalition, his carefully channeled premise was apparent. Contrary to the industry’s effort to frame the debate on smoking in terms of the right of each American to use the product or ignore it, Kessler stated that the cigarette manufacturers “may be controlling smokers’ choice by controlling the levels of nicotine in their products in a manner that creates and sustains an addiction in the vast majority of smokers.” This would represent a deceptive practice, to the FDA commissioner’s thinking, since “most people assume that the nicotine in cigarettes is present solely because it is a natural and unavoidable component of tobacco.” Kessler also pointed to dozens of patent applications that the tobacco companies had filed for processes to enhance the nicotine content of their cigarettes, but he did not go on to charge that these processes were in fact being used in tobacco manufacturing (though he would cite the long use of certain strains of leaf genetically developed to be extra-rich in nicotine).

Why, though, if the cigarette makers had mastered sophisticated production techniques to calibrate their nicotine yields, did they not remove the substance altogether, at least from some brands? Kessler suggested the answer to this most pointed of his questions by stating, “What appears to be true is that smokers become accustomed to, and associate, the sensory impact of nicotine (burning in the throat) with the resulting psychoactive effects of nicotine and thus look for these sensory signals in a cigarette; this is called ‘conditioned reinforcement.’” Or, as a layman might have put it, smokers would not have derived a “kick” out of entirely denicotinized cigarettes. But while it was certainly true that manufacturers knew, from their own laboratories’ studies and many published by outsiders, that nicotine was an addicting drug that surely helped sell their product to hooked customers, they could also point to the fact that they had long been marketing brands with sharply reduced levels of the addicting agent. And the further fact was that only about one of every
eight cigarettes sold fell into this ultra-low yield category of 0.6 milligram of nicotine or less, probably because such reduced yields did not satisfy the very yen Kessler had described.

Kessler confronted the option that the companies had provided—to “smoke down”—by essentially dismissing it as a marketing device. “It is a myth that people who smoke low nicotine cigarettes are necessarily going to get less nicotine than people who smoke high nicotine cigarettes,” he asserted, because smokers choosing the former brands could and did compensate “by altering puff volume, puff duration, inhalation frequency, depth of inhalation, and number of cigarettes smoked.” The manufacturers, Kessler added, achieved their lowered yields with devices that could be compromised by smokers but not by the FTC’s smoke-testing machines, such as ventilation holes around the filter and faster burn rates. This problem could have been avoided by removing more or all of the nicotine during the leaf processing instead of designing the nicotine reduction into the manufactured cigarette and its filter. In short, the whole industry was open to the charge of trying to fool the testing machines, as Brown & Williamson had been accused of doing with its Barclay brand.

The chief executives of the tobacco industry’s cigarette-making subsidiaries came before the Waxman subcommittee a few weeks later to answer Kessler’s charges and implications. There was a disingenuous, almost surreal quality about the whole hearing on the part of the interrogators as well as of the witnesses. Chairman Waxman and his fierce antismoking ally, Congressman Synar, seemed to attack their prey with postured indignation over the allegedly fresh revelations of nicotine manipulation when both plainly understood—or should have—that ample evidence had long existed to bring the cigarette-manufacturing process under federal regulation if only the bureaucratic will had been there or Congress had so directed. The tobacco executives, as was their wont, were still less candid, declaring that the evidence remained inconclusive that smoking caused any disease or addiction and conceding that they controlled the nicotine yields in their cigarettes but only to affect their taste. They might better have acknowledged that they had lowered tar and nicotine yields to meet the health charges against cigarettes, even if they had done so in a way that still permitted smokers to compensate who were determined or felt compelled to do so. They might further have admitted that for a great many, if not most, smokers, cigarettes were a very hard habit to break once begun, though millions of longtime smokers had quit—and those fearing their susceptibility to addiction were perhaps best advised to stick to the ultra-low brands.

Perhaps the closest the tobacco executives came to a persuasive response to the Kessler and health subcommittee charges was the argument raised by Philip Morris USA President William Campbell: “If we were supposedly intent on adding nicotine to cigarettes, why would Philip Morris have spent over $300 million to develop a process to denicotinize tobacco and launch ‘Next,’ a
near zero nicotine brand?” An equally good question in return would have been why had Philip Morris marketed Next so hesitantly and uninventively—could it, for example, have been given a duller name?—and brought it out only in selective test markets with little fanfare, almost as if the company wanted the brand to fail so that it could point to the halfhearted effort as evidence that there was no real market support for a denicotinized brand.

The net effect of Kessler’s testimony and the Waxman subcommittee’s exchange with tobacco executives was to put Congress and the industry on notice that the FDA commissioner was repositioning his agency with regard to government oversight of cigarette manufacturers. He would not act precipitously, making it clear that he was seeking further technical advice on the addicting nature of smoking as well as guidance from Congress, which held the ultimate power to define how the FDA could exercise its control over cigarettes. Washington insiders, watching Kessler maneuver, quipped that the young FDA lion, uneager to risk an overreach of power even if it could be defended as sound public-health policy, was really saying to Congress, “Stop me before I regulate”—meaning that unless Congress put down markers for him, he would have no choice but to ban cigarettes altogether as a drug-delivery system, whatever else they were.

That summer an FDA advisory panel told Kessler that, lest any doubt remained, nicotine was indeed an addicting drug and the main reason people smoked. The most constructive step the FDA might therefore take, Kessler was advised by addiction experts, would not be to ban cigarettes entirely, thereby precipitating a national trauma among smokers and illegal traffic in the product, but to impose a regimen on the manufacturers to reduce the maximum tar and nicotine yields by stages over a period of years—ten or fifteen perhaps, so the effect would hardly be noticeable—and drop dosages to below the probable threshold for addiction for most smokers. Kessler and aides hinted that they would consider such a measure as well as rules to cut sharply into underage smoking.

Confronted with the sudden appearance of a regulatory monster breathing fire in their direction, industry officials grumbled that this whole new FDA initiative had been trumped up and there was nothing at all new about the charges. Philip Morris attorney Steven Parrish summed up the companies’ position by remarking, “If Dr. Kessler wants people to try to quit smoking, he ought to tell them to try, because they can quit, and not characterize them as addicts doomed to fail … .”

VI

MICHAEL MILES’S
calculated gamble to slash the price of Marlboro and then of the other Philip Morris premium brands as well in March 1993 brought swift results. By December, Marlboro gained back
3½
market share points, ending the year with just under a quarter of the U.S. market once again. And Basic doubled its volume during the year, winning a 5.3 share of the market to become the nation’s No. 3 brand and the leader in the discount sector. Reynolds, having suffered a 58 percent drop in its third-quarter earnings as a result of the price cuts that Philip Morris had forced it to make on its own premium brands, late in the year announced a modest 2.7 percent price rise for all its brands—and Philip Morris was glad to go along. A truce had been called in the price war.

For all of 1993, PM’s net fell at about the rate predicted: 37 percent overall on a 46 percent drop in earnings for the company’s U.S. cigarette business, and while its unit sales for the year were off 9 percent, most of that drop had come before the price cuts kicked in. For Reynolds, the news was far worse: not only were its units down 3.5 percent for the year, but its operations had slipped into the red. Slowly, Wall Street began to recognize that Philip Morris, unlike General Motors, IBM, Sears, and other such corporate titans also once thought to be invincible, had not sat around letting itself be undersold by hungry challengers until it was too late to recover its commanding market position.

The new year brought tobacco industry executives, ever eager to spot a silver lining in their perpetually clouded skies, some signs to gladden them. The annual federal government health survey of 40,000 or so Americans showed, despite a continued drop of about 2 percent a year in the per capita consumption of cigarettes, that the proportion of the nation’s adults who still smoked was stabilizing at just under 26 percent. The proportion of smokers under eighteen was 19 percent and had stood fixed at that figure for a decade, even in the face of pressing efforts by doctors, educators, and public-health workers to discourage youngsters from taking up the habit. There was anecdotal evidence now, furthermore, that among educated and affluent young adults, “social smoking”—lighting up a few cigarettes a day or a week during dates or parties to enjoy the taste of burned tobacco and the sensation of flirting briefly with danger—was catching on. And U.S. unit sales for the year would actually increase for the first time in a decade. By any standard, an industry with more than 45 million customers spending $55 billion or so a year on its products remained a serious force in the national economy.

At Philip Morris’s Park Avenue headquarters, there was still more cause for
cheer. Sales figures piling up throughout the first half of the year were thoroughly confirming the pricing and marketing decisions of the previous spring. PM’s midyear cigarette unit sales were up 17 percent, while RJR’s had slumped 6 percent; for the second quarter, Marlboro’s market share hit 28 percent—its best ever.

Yet Wall Street analysts and investors were still unconvinced that tobacco stocks represented a good bet, even if the blue chip among them was showing every sign that it had weathered the crisis over slashed cigarette prices. The twin perils of far stricter government regulation and litigation regarding the health consequences of smoking had not abated; actually, both were looking more fearsome by the month. The FDA, OSHA, and the House subcommittee on environment and health were moving purposefully toward making the industry face up to the hazardous nature of its product. And while it was growing less and less likely that individual claimants like Rose Cipollone could persuade any jury in America to compensate them for injuries suffered after decades of smoking, a blizzard of new, broader-based suits with the potential for huge awards to the litigants was now swirling about the tobacco manufacturers. These included a class action in the name of 40,000 flight attendants claiming damage to their health from ETS exposure; suits by three sovereign states to recover their share of Medicaid payments to victims of smoking-related diseases, and a “mega-suit” brought by a consortium of leading product liability lawyers from more than fifty firms, each pledging $100,000 to their joint war chest, and filed in the name of millions of Americans who had allegedly become addicted to cigarettes due to the deceitful practices of their manufacturers.

It was not unnatural, therefore, in the early months of 1994, particularly after FDA Commissioner Kessler had speculated aloud that he might soon find nicotine an addicting drug requiring regulation by his agency, that executives at Philip Morris were fearful that the tobacco part of their business would permanently depress the value of their stock on Wall Street. Financial analysts and institutional investors with a heavy position in PM stock, including several big California and New York pension funds and the Teamsters Union, began, actively calling for the split-up of the company into separate tobacco and food entities on the theory that (1) the stock market would value the separated enterprises a good deal higher as an investment package than it did the existing company, if for no other reason than (2) its non-tobacco assets could thereafter be protected from claims over injuries from smoking. The idea had been considered by the chief instigator of the tobacco-food marriage—former chairman Hamish Maxwell—as early as 1990, but the political and legal climate had not yet turned so tempestuous. His successor had been hopeful that the industry might enjoy a respite of benign neglect during the early years of his tenure, but
the arrival of the Clintons in the White House had dashed that dream. As he contemplated the merits of a breakup of Philip Morris, Michael Miles recognized that such a proposal would be “a challenge to Hamish’s previous direction.” Yet Maxwell himself, very much on the scene as chairman of the PM board of directors’ executive committee though discreetly hovering at the periphery of the company’s daily operations, was by no means unalterably opposed to reconfiguring the edifice he had erected. “I had no strong sense that the company structure had to be forever,” he recounted.

The depressed price of its stock aside, there were several practical reasons for its managers to consider dismembering Philip Morris. The company might already have extracted optimum value from the strategy of aggressive tobacco pricing in order to acquire a major stake in another, far vaster industry. For despite his continuing efforts to meld the two businesses, Miles was coming to the conclusion that “the synergies maybe weren’t there, after all.” Tobacco, as he put it later, was “a screw-it, do-it” culture more intuitive than the food business “with its forty-four product categories, each subject to quantitative analysis.” As an outgrowth of this inherent difference and the divergent management styles it bred, senior counselor Maxwell had noted that the two sides of the house he had constructed “were not altogether happy with each other’s business.”