Why Philip Morris Decided To Make Friends With FDA
Seeking End to Uncertainty, Tobacco Firm Builds An Unusual Coalition for Regulating Cigarettes
By VANESSA O'CONNELL
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Philip Morris lobbyist John Scruggs journeyed from his office here to a Kentucky warehouse in March 2002 to meet with tobacco farmers. His mission: Persuade them to back a plan for the Food and Drug Administration to regulate the cigarette industry.
He knew it would be a hard sell when he saw several farmers sporting baseball caps with the legend "Keep FDA off the Farm!" -- hats that Philip Morris had given the farmers a few years ago.
It was a reminder to Mr. Scruggs that he and his employer were on a strange political odyssey. After years of rallying farmers, sympathetic politicians and other friends of the industry to oppose government efforts to regulate cigarettes, Philip Morris had switched sides.
Now, 18 months after Mr. Scruggs's tour of tobacco warehouses, Philip Morris's wooing of tobacco farmers may be on the verge of paying off. A bill headed for the Senate floor would put the tobacco industry under the regulatory purview of the FDA. That shift would create new marketing and manufacturing rules, such as more-stringent disclosure of harmful ingredients and more-visible health warnings in ads and packaging. The FDA could require that nicotine levels be reduced, even to zero.
In the long, circuitous journey that led to this legislation, a motley collection of interest groups managed to find common ground. Tobacco executives and antismoking advocates, Northeastern legislators and tobacco-state politicians, farmers and urban liberals came together in a most unlikely alliance.
It couldn't have happened without the lobbying clout of the tobacco farmers. Philip Morris recruited them by combining the bill with a measure the farmers badly wanted: to ditch an old federal subsidy program and set up a new system that would let them sell their leaf more easily and profitably.
ABOUT-FACE
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Philip Morris's halting path toward accepting Food and Drug Administration regulation of cigarettes:
• 1994: FDA Commissioner David Kessler wants to regulate nicotine as an addictive drug. Executives at Philip Morris and other tobacco companies deny nicotine is addictive and that smoking conclusively causes cancer.
• 1998: Major tobacco companies agree to pay 46 states $206 billion over 25 years for health costs associated with smoking.
• 2000: Supreme Court invites Congress to act on whether cigarettes should be regulated by the FDA. Steven Parrish, senior vice president at Philip Morris, admits nicotine is addictive, calls for federal regulation of tobacco.
• 2002: Sen. Edward Kennedy introduces bill putting tobacco under FDA authority. Philip Morris objects to bill and doesn't endorse it. It fails to gain traction.
• Fall 2003: A Philip Morris-supported bill is expected to be formally introduced in the Senate to put tobacco under FDA regulation, with some senators planning to link it to a $13 billion buyout package for tobacco farmers.
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To Philip Morris, a unit of Altria Group Inc., the FDA plan is the paradoxical key to its future success. Regulations have historically helped the company fend off rivals and hold onto its Marlboro brand's No. 1 position.
Before the cigarette industry's sweeping 1998 settlement of state lawsuits, Philip Morris fought the states' proposed restrictions on advertising. Today those rules amount to big barriers that keep rival brands from taking away Marlboro's market share. But now Philip Morris faces unprecedented competition from low-priced cigarettes made by a swarm of upstarts with names such as Bronco and Roger.
FDA regulation would force the upstarts to abide by a new code of manufacturing practices and ingredients. Philip Morris says FDA oversight also would help the company develop a plan to produce less-hazardous cigarettes that just might gain the agency's acceptance. The company says it has a potentially less-hazardous product -- code-named internally "Score" for "smoke constituent reduction" -- ready to bring to market, but would prefer to release it under FDA oversight. In the past, the industry has been reluctant to make safety claims because it worried about legal fallout from consumers, rivals and regulators.
The bill still faces opposition. Some Philip Morris competitors consider the measure a cynical ploy for the market leader to cement its dominance. Wednesday evening, Senate negotiators were still haggling over a draft bill's specific language on issues such as whether tobacco companies could appeal FDA rules that significantly cut into cigarette sales.
Philip Morris says FDA regulation is good business and good policy because it would create uniform standards for manufacturing and marketing by all tobacco companies. "The fact is that until FDA oversight is in place, we will not have an accepted and official external process to review our work," Michael Szymanczyk, chief executive officer of Philip Morris USA, said in a June 3 hearing on reducing the risk of tobacco use.
Philip Morris's about-face on the FDA began taking shape in the late 1990s and was set in motion in 2000, when the U.S. Supreme Court invited Congress to act on whether cigarettes should be regulated by the agency. Tobacco-industry executives had always seen any such move as anathema. But some Philip Morris executives were concerned about the image problems of "Big Tobacco." They began to wonder if regulation might improve the image, prevent more draconian measures down the road and solidify the dominance of the Marlboro maker over its rivals.
The executives were particularly worried about the inroads made by deep-discount cigarette manufacturers. Their market share has soared as high as 12% since they became active in 1999, and they aren't party to the 1998 Master Settlement Agreement, which required huge payouts from the big companies.
Most of all, Philip Morris wanted predictability. Its stock price doesn't respond well to the uncertainties of today's competitive and legal pressures. Steven Parrish, senior vice president for corporate affairs at Altria, recalls that John S. Reed, a former co-CEO of Citigroup and Altria's most senior director (until he left the board last week to head the New York Stock Exchange4), agreed that a moderate stance on FDA regulation might benefit the company in the long run.
Mr. Parrish hired Republican lobbyist Mr. Scruggs in 1998 and together they quietly began to pursue the legislative initiative. The first step was to test the waters with the enemy -- the antismoking camp. In March 2000, at the Ronald W. Reagan Presidential Library and Museum, in Simi Valley, Calif., Mr. Parrish appeared on a panel with former FDA commissioner David Kessler, who pioneered the idea of FDA regulation of cigarettes in 1994. Mr. Parrish made several statements that no one had ever heard from a tobacco executive before. Admitting that nicotine is addictive, he told the audience, "There needs to be serious regulation of the tobacco industry at the federal level." Antismoking groups were immediately suspicious, and some griped that Mr. Parrish was trying to influence the jury pool in future lawsuits.
Mr. Parrish next got together with Rep. Henry Waxman, a California Democrat and the industry's fiercest political foe. In a House meeting room, Mr. Parrish was contrite about his company's past mistakes and said it wanted to work more closely with health advocates, Mr. Parrish recalls. Rep. Waxman now says he was dubious about Mr. Parrish's intentions.
If it seemed difficult to win over Rep. Waxman and other antismoking advocates, it would be even tougher to woo conservative politicians, who on principle hated government regulation of any kind and didn't want to increase the FDA's power. Some Southern senators had close ties to Philip Morris's rivals -- including R.J. Reynolds Tobacco Holdings Inc., British American Tobacco PLC's Brown & Williamson Tobacco Corp. and Loews Corp.'s Lorillard. In the senators' view, any FDA regulation would strengthen Philip Morris.
The plan seemed dead until Mr. Parrish had the radical notion of courting the tobacco farmers. The farmers had great influence over these same senators, and many were struggling as declining consumption and imported tobacco crimped demand for their crop.
The "golden leaf" had once been highly profitable, aided by government price supports that assigned quotas to keep supplies down and guarantee a profit to the farmers. But a secondary market was created in those quota rights. Today, many of the holders of these rights aren't the farmers who till the land. That means tobacco farmers face the added costs of renting or acquiring these rights from middlemen, known as "quota owners." These bureaucratic requirements bogged farmers down with additional expenses of much as 50 cents to 60 cents for each pound of tobacco leaf grown. The proposed buyout would terminate the quota program once and for all, so that U.S. tobacco could be grown more efficiently and better compete with leaf grown overseas.
The buyout plan had garnered little political support in Washington in the past, but if it were linked to a larger package that included FDA regulation, it had a chance. So as Mr. Scruggs traveled the South to lobby farmers, he had a simple pitch: Philip Morris stood ready to support a one-time buyout plan, providing as much as $15 billion to the growers and others involved with the crop, in exchange for support of FDA regulation. (That windfall now looks to be closer to $13 billion.)
Mr. Scruggs, who is vice president of government affairs for Altria, was careful to say that the FDA would stay off the farm.
"We didn't want the FDA on our farm telling us which chemicals we can use. We don't see the need for FDA running our business," said farmer Scott Whitford, of Grantsboro, N.C., a contract grower for Philip Morris. "But lately, the people from Philip Morris have come here and told us they feel the FDA regulation will help us." Now he has joined the effort and called the offices of his Republican senators, John Edwards and Elizabeth Dole, to say so.
"People were skeptical -- skeptical of the FDA and skeptical of Philip Morris," says Mr. Scruggs. "But when you talk to them about a quota buyout, the response is overwhelming."
In May, Philip Morris sweetened the pot for the farmers by settling a nettlesome lawsuit in which the farmers alleged that Philip Morris and the other companies essentially rigged bids at tobacco auctions. Philip Morris agreed to make a series of payments to farmers totaling $145 million -- including $5 million earmarked for the farmers to lobby for the new legislation.
As Mr. Scruggs and others tried to court the farmers, Louis Camilleri, Altria's CEO, and Mr. Szymanczyk, Philip Morris USA's CEO, began making appearances on Capitol Hill.
In June, at one hearing before a House committee on reduced-risk tobacco products, Rep. Waxman lit into Mr. Szymanczyk, saying that weak FDA regulation of the sort the Philip Morris had previously endorsed would only lead to a repeat of the "light" and "low-tar" public-health debacle. Philip Morris and other cigarette companies had marketed their "light" brands as less harmful than regular cigarettes. But cancer researchers discovered that light cigarette smokers inhaled more deeply, taking in more of the harmful ingredients than smokers of regular cigarettes.
Mr. Szymanczyk told the congressman that he felt the FDA would even have the authority to demand that certain harmful ingredients be removed from cigarettes, a surprising concession. Rep. Waxman commended him. "When we talked about our differences, it seemed to me that we were pretty close," he said later.
Soon, key senators from tobacco-growing states began joining the fold. Mitch McConnell, a Kentucky Republican, in July introduced a buyout bill co-sponsored by at least 12 other Senators from tobacco-growing regions on July 30.
That month, Sen. Judd Gregg, a New Hampshire Republican and chairman of the Senate Health Committee, began circulating drafts of FDA legislation. He expects to introduce a bill this fall with the support of Massachusetts Sen. Edward M. Kennedy, the committee's top Democrat. Sen. Kennedy introduced a similar bill last year, but Philip Morris had objections to his plan and the bill failed to gain traction.
Now he is an important ally. He has high credibility on health issues among urban liberals, and though he had long favored FDA regulation, he had been skeptical of this plan because of Philip Morris's support. He warned public-health advocates of "industry-inspired plots" and called Philip Morris's plan one that "would only create a toothless regulatory tiger." His staff warns that Sen. Kennedy's support for the current proposal is offered only guardedly. But as of Wednesday night, he was involved in the negotiations.
Then the plan is to merge the two bills on the Senate floor. Both Philip Morris executives and leading tobacco critics thus far are working together with Sen. Gregg's staff, although the coalition could still wind up rupturing over the details.
The latest draft of Sen. Gregg's bill would authorize the FDA to reduce or eliminate nicotine. To placate Altria and its Senate allies, it also prevents regulators from making any changes that would "directly or indirectly" ban cigarettes. Antitobacco groups and lawmakers such as Sen. Kennedy oppose making that change to the draft bill because they fear Philip Morris and other companies will use it as a loophole to fight the FDA in court, arguing that the removal of key ingredients is tantamount to a ban. Another option advocated by Philip Morris is for the legislation to say that the FDA couldn't impose any rules that would make cigarettes "unpalatable" to consumers. Philip Morris didn't want to be required to make a product that smokers would reject. Critics view that as a potential escape clause from real changes that may make cigarettes less dangerous.
Write to Vanessa O'Connell at vanessa.o'connell@wsj.com5
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