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Tobacco Does It Have A Future?


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TOBACCO DOES IT HAVE A FUTURE?

It always seemed incongruous that Michael A. Miles, CEO of Philip Morris Cos., the world's largest cigarette maker, didn't smoke. But the significance of his resignation on June 17 was all too clear. Miles, the main advocate of a plan to split Philip Morris into separate food and tobacco companies, was suddenly replaced by Geoffrey C. Bible, an avid and unapologetic smoker--and a true believer in the war Philip Morris and other tobacco companies are waging against the growing antismoking legions. "It is our intention to defend our industry and consumers briskly and strenuously," Bible said at a news conference on June 21, brandishing a Marlboro menthol. "And you will see more of this."

No running. No hiding. No splitting off a business that to many seems doomed--in the U.S. at least--to be regulated or legislated out of existence. Despite complaints from some large shareholders, Bible and his board will keep Philip Morris intact. In fact, the executive shakeup is the latest and most visible manifestation of the industry's survival strategy: no retreat on any front.

Far from giving ground in the face of nationwide attacks by antismoking forces--as well as fresh revelations about their knowledge of the health risks of smoking and the addictive properties of nicotine--the tobacco companies are fighting back. Through massive public-relations campaigns, federal, state, and local lobbying barrages, ultra-aggressive litigation strategies, and sheer business acumen, the $47 billion industry has launched a bold counterinsurgency aimed at beating back its enemies, or at least holding them indefinitely at bay.

ON THE OFFENSIVE. In Florida, tobacco lobbyists have converged en masse to try to repeal the state's controversial new antitobacco law (page 29). In California, the industry has poured more than $10 million into lawmakers' campaign war chests in an attempt to influence their votes in numerous antismoking proposals. In the courts, they have gone on the gffensive against critics: Philip Morris recently sued Capital Cities/ABC Inc. in a $10 billion defamation case and challenged a strict smoking ban in San Francisco. Industry powerhouse R.J. Reynolds Tobacco Co. has launched a series of national advocacy ads to drum up grass-roots support and has sent its scientists and other representatives on a 28-city tour to woo local media and politicians.

The way the tobacco companies see it, they have no choice. To allow any breach in the granite wall the industry has erected between itself and liability for smokers' ills could invite the kind of massive litigation that spelled the demise of the asbestos industry. But tobacco's stiff defense isn't limited to the courts: Antismoking laws, attempts to hike cigarette taxes to pay for health care, and efforts to regulate cigarettes like a drug are being countered with equal tenacity. "Those who get wealthy selling tobacco will fight to the very end to continue to sell it," says antismoking activist Matthew L. Myers.

And they'll pay whatever it costs to do it. Legal fees alone could account for up to $600 million annually, says the Advocacy Institute, a Washington antismoking group. Philip Morris and RJR spent more than $235 million on ads for the 15 months ending March, 1994, according to Competitive Media Reporting. Tobacco companies spent $5.6 million in federal contributions during the 1992 election, according to the Center for Responsive Politics.

Although last year total profits fell 46% as a result of rampant price-cutting, tobacco makers have the muscle to put up a strong fight. Four of the six major tobacco companies in the U.S.--Philip Morris, RJR, Brown & Williamson, and Lorillard--remain enormously profitable. They, along with the weaker sisters, American Tobacco Co. and Liggett Group Inc., posted a combined operating profit of $5.2 billion in the U.S in 1993. The biggest players, Philip Morris and RJR, earned an additional $3 billion from their rapidly expanding overseas markets (table, page 26). This year, the industry's domestic profits should rebound 12%, to $5.8 billion, on flat sales, says Gary Black, a tobacco analyst at Sanford C. Bernstein & Co., which owns 10 million shares of Philip Morris stock.

The biggest gains will be by Philip Morris, whose domestic profits should rise 15% this year, to $3.2 billion on $11 billion in sales, says Black (page 26). Reynolds' domestic profits could jump 12%. Lorillard Inc.'s income could jump 15% to 20%, to roughly $460 million on $1.5 billion in sales, while Brown & Williamson Tobacco Corp.'s is projected to increase 10%. "The tobacco business has never been stronger," says R. William Murray, PM's new chairman.

The question is: How long can it stay that way? With smoking in the U.S. declining, lower prices depressing margins, and the looming threat of an excise-tax increase--not to mention the increased cost of putting up a spirited defense--many analysts believe the days of 20% annual earnings gains that the industry enjoyed a decade ago are gone forever.

The growth will have to come from such potentially lucrative markets as China, Eastern Europe, and Latin America. And while some experts believe the industry may eventually have the same problems in Europe and Asia that it does now at home, the developing world seems to have an insatiable appetite for American smokes. "Their original plan was to hold the fort until they could flood the Third World," says Victor L. Crawford, a former tobacco-industry lobbyist. "They've been successful."

With an army of well-connected lobbyists, powerful allies in Congress, sophisticated public-relations specialists, as well as 48 million smokers in the U.S., the industry has formidable weapons at its disposal. The tobacco lobby has thus far prevented an effort in the House to increase federal excise taxes on cigarettes from 45 cents a pack to 75 cents. And lobbyists are working to derail a bill that would ban smoking in most public buildings.

TERSE STATEMENT. Yet even tougher fights loom. On June 21, David Kessler, commissioner of the Food & Drug Administration, presented before a House subcommittee new disclosures that Brown & Williamson, maker of Kool, Raleigh, and Viceroy cigarettes, had secretly developed a tobacco plant during the 1980s that contained double the amount of nicotine found in other strains, then grew it in Brazil. Kessler stopped short of calling for a ban on cigarettes but indicated that the new evidence may induce his agency to seek to regulate nicotine. "We are not focused on regulation of cigarettes, we're focusing on nicotine in the cigarettes," Kessler insists.

B&W released a tersely worded statement: "Dr. Kessler has totally blown this issue out of proportion." But the FDA's gauntlet was thrown: If cigarettes are sold like drugs, it implied, then manufacturers could be forced to advertise them like drugs as well. No more billboards, no more Joe Camel, no more flashy displays or packaging. "It's not the antitobacco legislation that's the biggest problem," says one former tobacco lobbyist. "It's the ability to market your product."

In the courts, a new breed of lawsuit threatens to undermine tobacco's ability to outspend and outlive its opponents. By launching class actions, plaintiffs are attempting to surmount the hurdles they have traditionally faced in court when taking on tobacco companies as individuals. The latest crop of litigation, which includes at least seven class actions in six states, claims everything from unfair advertising to second-hand smoke injuries. And more cases are in the works, including suits by state regulators and private litigants under consumer-protection laws, say several lawyers involved in the litigation.

Yet cigarette makers are confident they will win. Despite these new legal threats, they say they haven't even set aside reserves to cover any losses--and they don't have insurance to pay for them, either. That's because the tobacco companies intend to pursue the same hardball legal tactics they always have: never settle claims, coordinate with all cigarette makers, wear down opponents, and spend as much as it takes to win. In one smoker's case, industry lawyers took 107 depositions but only used two at trial. "We expect to prevail in all the class-action suits and underlying claims," says Bible. "You must remember, we have never lost a case." Indeed, of an estimated 300 health-related suits filed against the industry over the past 40 years, manufacturers have never had to pay out a dime to accusers.

Yet now, tobacco companies face the more dangerous threat of criminal prosecution. Thousands of leaked B&W documents allegedly show a pattern of deceit and misconduct by the industry over the past 30 years. Among the papers are accounts of efforts to develop safer products, studies that allegedly linked smoking with cancer and other diseases, and an admission of the addictive qualities of nicotine. Despite the critical nature of the findings, however, the company allegedly kept them secret--a decision that prosecutors might argue purposely and unnecessarily endangered public safety. Brown & Williamson has declined to comment on the documents' content.

HAZARDS. This has fueled calls for criminal probes into the tobacco companies' business practices. And it appears that those calls may soon be answered. On June 21, lawyers from the Justice Dept.'s Criminal Div. met with Representative Martin T. Meehan (D-Mass.) to discuss launching an inquiry into perjury, racketeering, and conspiracy to defraud the public, among other things.

Meanwhile, Justice is pursuing a civil antitrust investigation into whether tobacco companies secretly agreed to drop efforts to develop safer cigarettes. And a criminal investigation begun in 1992 by the U.S. Attorney for the Eastern District of New York is continuing to examine allegations that manufacturers conspired to use the Council for Tobacco Research, an industry-backed group, to deceive the public about the health hazards of smoking.

Some corporate insiders, in an uncharacteristic admission, seem to recognize the ominous nature of the current atmosphere. "I've been worrying about tobacco-related issues from a litigation context for about 10 years," says a tobacco company source, "and, quite frankly, I've not seen anything like what's gone on the last three months."

But doomsday scenarios could be premature. Legal battles in the civil arena are typically protracted. This is particularly the case with tobacco defendants, who have the money and desire to take advantage of every legal avenue available. And legal experts say that even if the companies lose a handful of cases, their aggressive tactics will keep plaintiffs from seeing their awards for years to come.

The new class actions will be no exception. Plaintiffs want to avoid having to prove the cause of each class member's illness--a hurdle that has historically been tough to overcome. Instead, they plan to rely on scientific studies that show what percentage of disease is linked to smoking, contending that it would be too difficult, expensive, and burdensome to produce medical data for individual plaintiffs. But the tobacco companies are intent on fighting this tack, arguing that they can't be asked to pay for specific health costs based on general statistics. "They will have to prove what the situation is for each person," says Robert C. Weber, a partner with Jones, Day, Reavis & Pogue and a member of RJR's outside legal team.

That will be a costly endeavor that may not prove worth it. A June 1 study commissioned by Sanford C. Bernstein & Co. found that while potential jurors believe cigarette makers are evil, they don't necessarily want to compensate smokers, states seeking Medicaid money, or anyone exposed to second-hand smoke. Sympathy for plaintiffs, says Peggy Shelly, a market researcher who moderated the groups, "didn't translate into money against the industry."

The legal wrangling won't just be in court. Industry representatives traveled on to San Antonio to mingle with state attorneys general at their annual meeting that began June 22. Their goal: to dissuade a growing cadre of antitobacco lawyers from following the lead of Mississippi, which on May 23 filed a class action against cigarette manufacturers seeking reimbursement for Medicaid expenditures for tobacco-related illnesses. Their efforts may be too late. West Virginia is likely to soon take action. And Mississippi Attorney General Mike Moore says, "I've had a lot of inquiries from my brothers and sisters in the attorneys-general business."

LAVISH SPENDING. Legislatively, though, tobacco lobbyists are out in force in states such as Maryland, Massachusetts, Minnesota, and California, where antismoking sentiment is rife. In Maryland, lobbyists successfully killed the majority of antismoking bills since the beginning of the year.

In California, where 200 local antismoking ordinances have passed in the past two years and continue to pass, on average, at a rate of one per week, an industry-backed referendum that would preempt all those ordinances with more lenient rules about where smokers can light up is expected to make it on the state ballot. Since 1990, the tobacco industry has spent lavishly in California--giving Assembly Speaker Willie Brown alone over $200,000 in the last election year. According to Stanton A. Glantz, a professor of medicine at the University of California at San Francisco, the average contribution to California legislators is $10,400--more than twice what the industry gives to federal legislators.

At the same time, tobacco lobbyists appear to be having success watering down the impact of Proposition 99, which was passed in 1988 and imposed a 25 cents-per-pack tax on cigarettes, the spoils of which went to fund medical and education programs and an anti-smoking advertising campaign by the Health Dept. "It looks like they're going to gut the program," laments Glantz.

As it pursues its agenda in legislatures and the courts, the tobacco industry has embarked on a well-crafted plan to bolster its image. Reynolds and Philip Morris have turned to their constituencies to help out. RJR, for instance, set up a toll-free number for consumers to call when they hear of antismoking initiatives. "We can't learn of every antismoking plan the very moment it comes up," wrote one Reynolds executive in an Apr. 22 letter sent to smokers. "That's why we count on you." Philip Morris gave smokers and shareholders a blueprint earlier this year for writing letters to lawmakers to oppose the tax increase on cigarettes.

Tmbacco executives recognize they still have a serious image problem. "We need to make people understand that the cigarette industry is not made up of a bunch of evil people," concedes Steven C. Parrish, general counsel to Philip Morris USA, the company's domestic tobacco division. "I think it's going to take a lot to restore our credibility."

Credible or not, the tobacco industry's real power lies in the massive amounts of cash its flagship product throws off every year. Tobacco executives say they don't truly fear regulation by the FDA, in large part because the government can't afford to give up the billions of dollars it collects annually in income tax from cigarette manufacturers and in tobacco excise taxes it collects from states. Philip Morris paid $12.9 billion in excise and income taxes in 1993, and Reynolds paid $3.9 billion.

A host of regulators, legislators, and antismokers want to sharply regulate the tobacco industry or even shut it down. Yet while smoking may be increasingly socially unacceptable, it isn't going away. The economic, legal, and legislative forces that keep the industry strong are too well entrenched. And it's unlikely that the quarter of the population that truly enjoys smoking will stand idly by while antismoking forces further curtail their liberties. Like cigarette smoking itself, the U.S. may find that the tobacco industry is a difficult habit to kick.

STRATEGIES FOR SURVIVAL

SEND IN

THE LAWYERS

As legal pressures mount, the industry's strategies have grown more aggressive. On Feb. 1, Philip Morris challenged a San Francisco smoking ban in court, and tobacco companies have threatened to do the same in Maryland. Philip Morris sued ABC on Mar. 24, seeking $10 billion in a defamation case.

HIRE THE RIGHT

FRONT MEN

Philip Morris CEO Michael Miles, a former food exec, didn't lobby aggressively for tobacco causes. He abruptly resigned on June 16. His replacement: Geoffrey Bible, a career tobacco man who frequently appears in public holding a lit cigarette. R.J. Reynolds CEO James Johnston is featured in full-page ads with a smoke.

LOBBY, LOBBY,

LOBBY

Tobacco companies aim to shape smoking laws--and want re-tailers and smokers to join the battle. In California and elsewhere, they want to replace local anti-smoking initiatives with less restrictive statewide rules. And tobacco wants other industries to help fight a Florida law that would charge them for tobacco-related health care.

PUSH PUBLIC

RELATIONS

The industry has started courting the press aggressively. R.J. Reynolds execs are meeting with local reporters and politicians on a 28-city tour. Ad campaigns tout smokers' rights and freedom of choice. And after a TV program charged them with "spiking" cigarettes with nicotine, manufacturers opened up factories to the FDA.Linda Himelstein and Laura Zinn in New York, with Maria Mallory in Atlanta, John Carey and Richard S. Dunham in Washington, and Joan O'C. Hamilton in San Francisco


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