Nicotine Pouches

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US FDA takes action against retailers for underage sales of ZYN: April 2024

US FDA announced1 the issuance of 119 warning letters to, and the filing of 41 civil money penalty complaints against, brick & mortar retailers that engaged in the underage sale of various flavors of ZYN nicotine pouches between October 2023 and February 2024. US FDA has also issued warning letters to three online retailers for the sale of unauthorized, flavored ZYN nicotine pouches, including Espressino, Black Cherry, Lemon Spritz, and Cucumber Lime.

Data from the 2023 National Youth Tobacco Survey show ~1.5% of youth reported currently using nicotine pouches, and use has remained unchanged among youth in recent years. However, FDA notes that they have received reports about the potential increased popularity of these products among youth, and the products are also a popular topic on social media among youth and social media influencers.

US FDA also underlines that no ZYN product has not been authorized for sale in the US as of April 2024.

First ZYN Lawsuit in the US: March 2024

In our note below (January 2024), we highlighted the risks associated to ZYN’s “explosive” growth in the US and mentioned the new market chatter: Is Swedish Match to PMI what JUUL was to Altria? Acquisition from Hell?

Philip Morris International now faces its first major legal challenge2,3 for ZYN in the US on the basis of ZYN being addictive and harmful to young people. The lawsuit says that ZYN pouches deliver more nicotine than cigarettes and that PMI benefits from “Zynfluencers” who promote the brand on social media (with an estimated 30,000 TikTok accounts that use the hashtag #Zyn).

The single plaintiff alleges addiction and dental issues as a result of ZYN use. The suit seeks class-action status and claims that PMI and Swedish Match failed to warn about the risk of addiction and other harmful effects like cognitive issues, cardiovascular injuries, gastrointestinal problems and gum disease. The case was brought by the law firm, whose initial lawsuit against Juul Labs investors (including Altria) expanded into thousands of legal actions and led to Altria’s eventual settlement of $235Mn.

BAT – Emerging Markets: Feburary 2024

In FY23 Earnings release, BAT stated that

– in Pakistan, through stronger consumer acquisition, BAT has achieved the highest active consumer base (as a % of population) in modern oral nicotine category globally

– in Kenya, the accelerated national roll-out in January 2023 has driven a near fourfold increase in number of adult consumers

– together, learnings from these two markets give confidence to unlock the emerging market potential for modern oral nicotine category going forward.

However, a week later, in its own FY23 Earning release4, BAT Kenya [in a somewhat contradictory tone] stated that the regulatory uncertainty relating to the modern oral category resulted in disruption of nicotine pouch supply to the market. Additionally, this uncertainty impeded BAT’s ability to use the nicotine pouch factory in Nairobi for the domestic and export markets.

US Senate Majority Leader calls for federal action on ZYN: January 2024

In a press conference, the US Senate Majority Leader (Democrat) called ZYN “pouch packed with problems” and urged the Federal Trade Commission and Food and Drug Administration (FDA) to investigate ZYN over its marketing practices and health effects. The Senator claimed that nicotine pouches are used by teens as an alternative to e-cigarettes and called for federal action to crack down on ZYN. These comments prompted a strong reaction from Republicans who openly offered support to ZYN on Social Media5.

However, even the slightest mention of ZYN crackdown is enough to chill the market. Philip Morris International (PMI) has a high-stake bet running on ZYN: PMI expects the US nicotine pouch category to be three times of its current size in 2030 and projects US$3.5Bn net revenue from ZYN in the US. PMI even presented ZYN’s stellar results before (less than stellar) IQOS during the Q3 2023 Earnings release.

PMI paid $16Bn in 2022 to acquire Swedish Match to gain presence in the smokeless category (especially, nicotine pouches and the ZYN brand) and access to the US market (Recall: Tobacco Industry: Acquisitions). However, the US FDA is yet to offer its verdict on nicotine pouches. Review of the pending ZYN PMTAs are expected to be completed towards the mid of the year. Would US FDA reject all flavored ZYN PMTAs and hand over the flavored nicotine pouch market to the illicit products and illegal sellers? And, even worse: what if PMI finds itself drowning in US litigation due to its alleged “marketing practices” – similar to the Altria and JUUL?

The new market chatter: Is Swedish Match to PMI what JUUL was to Altria? Acquisition from Hell?

PM – ZYN Expansion Plans: September 2023

PMI targets 800Mn-1Bn nicotine pouch cans volume by 2026, mostly from the US, and expects international growth (outside the US) only in the mid-/long-term. Regulatory uncertainty (i.e. legal status of the product) and consumer readiness are the two impediments to ZYN’s progress in the international markets. In the foreseeable future, geographical presence of nicotine pouches seems to remain restricted to the US, Nordics and a select few markets with regulatory clarity.

55% of PMI’s oral nicotine revenue is already associated to ZYN sales in the US. This figure is set to increase as ZYN US is growing much faster (3-year volume CAGR: 51%) than the rest of the oral nicotine category. Thereby, it is all about the continuity of “stellar performance” of ZYN in the US in the 2024-2026 planning period. On 12-month rolling basis (ending June 30, 2023), PMI shipped 292Mn ZYN cans to the US market and reported more than 40% sequential growth. PMI needs ~30% annual volume growth in ZYN US shipments in order to achieve its “800Mn-1Bn cans by 2026” target. This seems to be – more or less – achievable considering the ongoing sales momentum in the US (i.e. ongoing velocity growth in the Western region and eventual extrapolation of the Western region’s performance to the Rest of the US) and the competitive restrictions brought in by the US FDA’s PMTA process.

PMI expects the US nicotine pouch category to be 3 times of its current size in 2030. This is not implausible. PMI also mentions $3.5Bn net revenue form US ZYN in 2030 assuming the same category share (i.e. 76.8% by value). This is implausible. Why? (1) The competition will heat up as BAT and Altria become able to introduce new/better products to the market (i.e. once the PMTA bottleneck is cleared out). Recall that PMI has 58% share in snus and only 15% share in nicotine pouches in Nordics (Swedish Match’s own turf); (2) US States and even the Federal Government will eventually start introducing/increasing excise on nicotine pouches.

As a summary, PMI’s 2026 nicotine pouch target seems reasonable. However, it will be more problematic to keep the growth momentum going beyond 2026 – especially if an unfavorable regulatory environment builds up in the international markets.

References:

  1. https://www.fda.gov/tobacco-products/ctp-newsroom/fda-issues-warning-letters-and-files-civil-money-penalty-complaints-against-retailers-underage-sales ↩︎
  2. https://www.bloomberg.com/news/articles/2024-03-01/is-zyn-harmful-lawsuit-against-philip-morris-pm-alleges-so ↩︎
  3. Schlesinger Law Offices, P.A. Sues Philip Morris & ZYN for Misleading Advertising ↩︎
  4. KE FY2024 Results (Print) (batkenya.com) ↩︎
  5. ‘Zynsurrection’: GOP rallies behind Zyn nicotine pouches after Schumer call for action | The Hill ↩︎

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