POWELL, Mr Mark, Manager, Public Policy, Philip Morris Limited

SMITH, Dr Maurice, Scientific Affairs Fellow, Philip Morris Limited

[13:58]

CHAIR: Welcome. Does either of you object to being recorded by the media this afternoon?

Mr Powell : No.

Dr Smith : No.

CHAIR: I remind you that these are formal proceedings of the parliament. The giving of false or misleading evidence is a serious matter and could result in a possible contempt of parliament. Your evidence today will be recorded by Hansard and attracts parliamentary privilege. We have your written submission and you have tabled some additional information this afternoon, which we will consider at the end as a possible exhibit for the inquiry. I invite you to make a short opening statement.

Mr Powell : Thank you for the opportunity to appear before you today. The government NDSHS report released last Thursday shows that three million Australians currently smoke and that smoking prevalence 'did not significantly decline between 2013 and 2016'. Indeed, The Australian recently reported that there were 20,000 more adult daily smokers in 2016 than in 2013. The NDSHS report also shows that one-third of current daily smokers don't want to quit.

While Australia has enacted some of the strictest tobacco control laws in the world, it is unlikely to meaningfully decrease smoking rates or reduce the harms associated with smoking unless it does something different. Philip Morris is committed to a smoke-free future where electronic cigarettes and personal vaporisers will replace cigarettes. It's what our consumers want and what society expects. Our vision is already starting to be realised. Since our submission we have announced that over 70 per cent of our global R&D expenditure and 30 per cent of our commercial expenditure will be allocated to smoke-free products and investment of $2 billion to build or convert factories for the production of smoke-free products. Crucially, over three million people have quit smoking and switched to IQOS, the first of our reduced-risk personal vaporiser products. This number is more than the total number of smokers in Australia, and 8,000 more join them every single day, although unfortunately none are in Australia. We expect that by 2025 at least 40 million consumers who would have otherwise continued smoking will have switched to our smoke-free alternatives, and our aspirational goal is that at least 30 per cent of our product volume will come from these products.

I know that many Australians have long viewed tobacco companies as part of the problem, but we will demonstrate that our company is changing and we're bringing practical, science based solutions to the table in pursuit of our smoke-free vision. My colleague Maurice Smith will now discuss some of the scientific research and assessment of our products.

Dr Smith : I'm a toxicologist with a PhD in medicinal chemistry. I conducted research into how certain compounds in smoke cause toxicity. In the past I've worked for the UK Department of Health, Cancer Research UK and Unilever in this area of toxicology. I joined Philip Morris in 2006 to conduct research on reduced-risk products.

Cigarette smoking is the leading cause of premature death and disease in Australia and around the world. The principal causes of those diseases is not the tobacco and it's not the nicotine; it's the way nicotine is delivered in the smoke from tobacco combustion. I think every person giving evidence before this committee conceptually agrees on this point. Yet the only form of tobacco product currently allowed in Australia must be prepared and packed for smoking. If smokers could use cleaner forms of nicotine, their risk would be substantially reduced. That is, by harm reduction, millions of Australian lives could be saved. Again, every person who has given evidence before this committee conceptually agrees on this point, too.

Our goal is to develop, assess and commercialise products that significantly reduce risk compared with cigarettes and to which smokers can switch. How do you assess whether a product reduces the risk of disease when those diseases take many decades to manifest? We have performed billions of dollars worth of research over a decade, which we have summarised into over two million pages in our submission to the US FDA. This evidence shows reduced risk to individual adult smokers and to the population as a whole. We do a range of studies, all of which compare the difference between cigarettes, our smoke-free products and smoking cessation, using smoking cessation as the gold standard. Where the effect in smokers who switch looks different to continued smoking and more like quitting, we have confidence that the risk is reduced. Extensive tests have confirmed this result, as you can see from the document we've tabled.

Eliminating combustion reduces the formation of harmful constituents by an average of 90 to 95 per cent, which in turn reduces the toxicity by 90 per cent of more. In clinical studies, smokers who switch reduce their exposure to levels of harmful compounds in line with smokers who quit. Clinical markers of smoking related disease show similar biological changes to smoking cessation. We have tested our products premarket, and continued to monitor, post-market, who uses them and how. We've consistently found that smokers are highly interested in these products and many switched to them completely, while nonsmokers and former smokers are not.

Mr Powell : Before we finish, I want to draw your attention to the experience of three island nations who've adopted very different approaches: Australia, the UK and Japan. Despite Australia's introduction of the toughest tobacco control measures in the world, the impact of Australia's ban on smoke-free products shows up in the data when our smoking prevalence is compared against the reductions in the UK and Japan, two countries with more liberal rules that have allowed, or even encouraged, harm reduction. Official smoking data from the UK, equivalent to our own, shows that smoking prevalence fell by 3.1 per cent compared to 0.6 per cent in Australia—please think about that. Since 2013, UK smoking rates have dropped more than five times faster than ours. They have similar tobacco control policies but a radically different approach to tobacco harm reduction.

Within just over a year of the national launch of IQOS in Japan in April 2016, consumer purchases of our heated tobacco products there represented 12.7 per cent of the total tobacco products sold. Now, more than two million Japanese smokers have fully converted to IQOS. Again, please consider that in context. In the last two years more Japanese smokers have quit by switching to heated tobacco than have quit smoking in Australia over the last 25 years, despite no particular government action. Further, our presence in the heated tobacco market has been followed by other tobacco companies. So total quitting and switching to heated tobacco is even greater and growing rapidly. This significant progress cannot be replicated in Australia due to a system of laws and administration which, in most cases, was originally designed in good faith to reduce the harm caused by tobacco consumption but which now prevent smokers from switching to innovative technologies that can reduce risk and benefit public health. Thank you, we'd be very pleased to answer your questions.

CHAIR: You mentioned in your evidence that by 2025 you're hoping to see 40 million consumers using your e-cigarette products. How many consumers would you expect to be using tobacco smoking products in 2025?

Mr Powell : We estimate it's about 150 million consumers now and would be hoping to switch at least that number, assuming a constant market share and other market dynamics.

CHAIR: So you hope to switch 40 million?

Mr Powell : By that period.

CHAIR: You've got a 150 million consumers today and by 2025 you're hoping to switch 40 million of those to e-cigarettes—is that correct?

Mr Powell : At least. As you would appreciate, these are actually KPIs being put in place for our global CEO. If we don't meet those KPIs then his pay and performance will respond accordingly. It's not an aspirational goal; it's what he will be rewarded on if he succeeds or, I guess, not rewarded on.

CHAIR: So the company's not forecasting an increase in the number of consumers for either product?

Mr Powell : An increase in heated product?

CHAIR: Either—the total pool.

Mr Powell : Not at all, and we haven't seen that on the ground in Japan, where we've been the longest.

CHAIR: So you're assuming globally that today there are 150 million consumers—

Mr Powell : Of Phillip Morris products.

CHAIR: of Phillip Morris products. In 2025 there will still be 150 million consumers, but the cut will just be different between smoke products and e-cigarettes.

Mr Powell : Sorry, perhaps I didn't answer your question very well. The WHO estimates that by 2025 there will be over one billion smokers, which is roughly the same number as there are today. What we anticipate, and what we have seen on the ground in Japan, is that we would convert large numbers of people to heated tobacco from the existing smoking population. We would basically take market share from ourselves from combustible tobacco to heated tobacco, and we would also take market share from other tobacco companies as well. We haven't got an estimate, to my knowledge, of how many smokers we would have. What we're looking at is that we would have converted, at least from our portfolio, that number, and hopefully many more, depending the regulatory environment.

CHAIR: But it is fair to say, though, that if you've got 150 million customers today you anticipate roughly the same number in a 7½ years' time, and you're hoping that 40 million of those people will be using e-cigarettes or heated tobacco.

Mr Powell : We would hope to have converted at least that number.

CHAIR: You mentioned that 70 per cent of your R&D is now being expended in the e-cigarette category, to use that term broadly. What, predominantly, is the remaining 30 per cent spent on?

Mr Powell : In many countries, regulatory compliance requires us to measure the output of particular tobacco products if there's any change in the design or, for example, the tobacco used. Tobacco will change year to year—for example, it could be more moist one year—so you are required to make changes. Even in Australia, we're required to report on those. So things like that would go into our overall R&D. I would have to take a more detailed question on notice and come back to you.

CHAIR: If you're taking that on notice, does Philip Morris Limited spend any R&D on developing new smoking based products or redesigns of existing products?

Dr Smith : We spend R&D money on ensuring that the existing tobacco products that we sell are not increasing in risk. We know that they are risky products, but we want to make sure that nothing that we add to them now or in the future will increase that risk. That's part of our product-stewardship activity.

CHAIR: In which country do you have the largest presence for e-cigarettes from your product range?

Mr Powell : For heated tobacco?

CHAIR: Yes.

Mr Powell : I can't speak to e-cigarettes, although we are involved in that market, but, for heated tobacco, it's Japan—

CHAIR: I mean e-cigarettes broadly.

Mr Powell : Certainly. It would be Japan.

CHAIR: What proportion of your marketing funding in Japan would go to promoting e-cigarettes as distinct from smoking cigarettes?

Mr Powell : I would have to take that on notice to get you a precise number, but the vast, vast majority would be on our reduced-risk products.

CHAIR: If I went across the border to China, what proportion of your marketing budget would be spent on e-cigarettes there?

Mr Powell : We don't sell e-cigarettes in China. China's a bad example because it's a government-regulated monopoly. We haven't launched any reduced-risk products there, so the answer would be zero.

CHAIR: What about Vietnam?

Mr Powell : We haven't launched there either, so, again, it would be zero.

CHAIR: What about Thailand?

Mr Powell : We haven't launched there, so zero.

CHAIR: So the market at the moment is in the First World, basically?

Mr Powell : No. We have launched in countries like South Africa.

Dr Smith : We've launched in South Africa, Kazakhstan and various other countries.

Mr Powell : We've launched in Colombia.

CHAIR: You have launched in those countries?

Mr Powell : Yes.

Dr Smith : Yes.

CHAIR: So there are a couple of non-First-World countries, if I can put it that way?

Mr Powell : I should say that there are only 30 countries where that IQOS product has been launched.

CHAIR: Obviously you've committed to a smoke-free future. I'm just wondering—as part of those KPIs that you mentioned that the company's developed—whether you have a KPI as to when that smoke-free future will arrive?

Mr Powell : We don't have a precise date. If I may, I'd like to table a copy of a report that we recently produced to the UN Global Compact. It has a great deal of detail around the level of switching and investment and what we expect going forward. I think I mentioned the numbers in my opening statement around exactly how far we would expect it to be, but it all depends on issues of regulation. For example, in Japan we were able to launch the product without preapproval. We have just gone to taking away conventional cigarette-smoking customers and converting over two million of them to IQOS. It's been very rapid. The take-up of people switching to heated tobacco has been at about the same rate in most of the countries, and we have some information around that in the pack that we've shared. I think, largely, between 60 and 80 per cent of people are converting or fully converting from smoking cigarettes to heated tobacco. But, of course, the number of people you can communicate with and tell that these products are available and that they should switch to them changes depending on the regulatory environment. That is an uncertainty going forward out to 2025.

CHAIR: You spoke about the health impacts of e-cigarettes, again, using that term broadly. The committee has been presented with conflicting evidence, ranging from there being significant reductions in harm through to the potential for there to be equal or greater, but largely unknown. The proposition that's been put to us is that, if you're taking the precautionary approach, it is far too early to be making a judgement about the long-term effects of using e-cigarettes. Forty years ago, your predecessors probably would have sat here and said there are no long-term effects of smoking. How can we be confident that we are not looking at a product that, 20 years down the road, we will find is regarded as the cigarette of today.

Dr Smith : If we focus on a heated tobacco product, that's where we have the best data. We carried out an extensive research program. As I mentioned, it is very difficult to know what's going to happen in 20 to 30 years when some of the diseases related to smoking could develop, so we've spent a lot of money to understand how cigarettes cause disease and we've looked at the mechanisms by which that happens—the cellular mechanisms and the biochemistry and chemistry of that. We can then look at how cigarettes trigger these reactions, these disease mechanisms which ultimately lead to disease, and make sure our new products don't trigger the same effects. We also have to make sure we're not triggering some new effects, so we have a pretty robust approach which looks across various disease steps in the process that would ultimately lead to lung cancer, COPD and heart disease, for example. It's not perfect, but it's the best that we can do. It's an expensive activity, but there are various steps in that. We do the pre-market, obviously launch the product and then to post-market surveillance as well to track what happens over time. We would have to share that data with regulators as well. We do not want to let the genie out of the bottle and then not be able to get it back in. The products would be approved in the US. You have a certain length of time in which you have to have all of the post-market data reviewed and then you go back to seek approval again for an extension of that. I think that's a reasonably protective approach for the consumer and also for the regulator.

Mr Powell : I could add to that. There's a product that you may have heard about during the process of these proceedings called snus, for which there is 50 years of epidemiological evidence. For example, in Sweden, where it's from, it has contributed to the lowest smoking rates in the world—literally in the entire world—and Australia has banned that product. We haven't always looked at the epidemiological evidence, even where it's available. Maurice mentioned the US approach where the congress, 10 years ago, established a process by which companies could bring evidence to secure an approval. Part of that process is that you must cross a threshold where you establish that there is no net detriment to public health and, indeed, there must be an improvement. There are 400 tobacco scientists assessing our application right now to do that. There are lessons to learn from the regulatory system in the United States or, indeed, New Zealand, which has announced a similar system or a related system.

Mr ZAPPIA: Dr Smith, in your opening remarks you acknowledged that smoking is the leading cause of death in the world, or words to that effect. If that is so, why does Philip Morris continue to manufacture and market cigarettes?

Dr Smith : Because it's a legal product. We recognise that there is a desire amongst many smokers to continue smoking, but we feel a responsibility. Obviously, it's important to offer them safer alternatives. If we stop selling cigarettes overnight, that space will be filled by others and often that would be by less reputable companies than our own. We're in the transition phase of moving away from combustible products to non-combustible products and delivering nicotine in a cleaner form. It's a transition which is going to take a number of years to complete.

Mr ZAPPIA: When did Philip Morris begin carrying out research into electronic cigarettes?

Dr Smith : There were our heated tobacco products. When I joined 11 years ago, the work had begun already. We launched a previous version of a tobacco-heating system, which was not successful commercially. There were some technical challenges with that product as well. We learnt a great deal from that process and have now invested in our new product, which is sufficiently acceptable to smokers to allow them to make the switch. Because we have a portfolio of products, we're confident that we do have a smoke-free future and we'll be able to market these products in the future and reduce our combustible products.

Mr ZAPPIA: When was the first product you just referred to launched or at least researched? When was the most recent one?

Dr Smith : I think the work began about 20 years ago, initially. I think the previous version of our heated tobacco system was launched just before I joined, so it would be 2005 or 2006—something like that. That remained on the market in a number of countries but was not successful. We realised we would have to improve the product, so we reduced the temperature at which the tobacco is heated and those sorts of things. The new product was launched in 2014 in Japan and in Italy.

Mr ZAPPIA: So it's only been on the market for, at best, 2½ years or three years.

Dr Smith : Yes.

Mr TIM WILSON: Thank you for coming and presenting today. It's been a very useful inquiry to understand the risks from every perspective. It would seem logical to me that you have a large part of your business dedicated towards, as you call it, combustible tobacco. That's obviously, at least in this country, a diminishing business because of tax environments, regulation and everything else. Logically, a company would be looking for alternative options to substitute consumers. Equally, we noted there are very significant, harmful health risks associated with combustible tobacco. Would it be a fair assumption to say that by encouraging people to switch to liquid tobacco products or heated tobacco products consumers are likely to live longer lives while continuing to consume the products? Would that be fair?

Dr Smith : Yes.

Mr TIM WILSON: In light of that, we also know that heavy regulation now applies to tobacco, particularly through tax arrangements as well as the introduction of policies that make products essentially interchangeable—for instance, plain packaging. It means, I suspect, there's been a decrease overall or at least a stabilisation in price and a reduction of profit margins. Is that also correct for traditional combustible tobacco products?

Mr Powell : There's certainly been more price competition, which has reduced prices relatively speaking. One factor of reducing prices is that it affects both the supply and the demand.

Mr TIM WILSON: This is just putting a question out there; I'm not sure if you've got the data with you. Is the profit margin on heated tobacco greater than it would be on a traditional combustible cigarette or tobacco product?

Mr Powell : It entirely depends upon the regulatory regime, the taxation regime and the pricing of the products in the market. For example, in Japan the profitability of those heated products is greater than the conventional combustible cigarette market. They have been treated as a premium product, and despite that we've seen very rapid conversion of people from smoking to heated tobacco.

Mr TIM WILSON: Principally driven because people want the diminishing health consequences of taking heated tobaccos versus combustible cigarettes? Obviously, it's consumer taste and preferences and all of those sorts of things, but they're trying to live a healthier life—or that's the ambition, anyway. Would that be a fair assessment?

Mr Powell : I'm certain that it's true. Because we have not yet been through the finality of the FDA process, we actually don't sell those products in Japan as being healthier. They're not risk-free; they reduce risk. So the reasons people are consuming those in Japan are, for example, reduced smell and no ash. I'm sure that some people would understand that. Indeed, we've conducted research in the United States for the purposes of the FDA as to people's understanding. Perhaps we could talk a little bit to that.

Dr Smith : In Japan, as Mark said, we don't make any health claims; they're convenience claims. And that works particularly well in Japan, I think, because there's less impact on those around you. But in terms of our commitment in the US to the FDA, we have performed a lot of what we call perception and behaviour studies. This is altogether I think 10,000 participants in various studies where we showed the product. We explained how the product worked, we showed the claims that we were considering to make and we showed the warning labels that go with the product, because it's very important to inform consumers that the products are not risk free, that they contain nicotine, that nicotine's addictive and that these products are not without risk. So, we've looked at that information. We've performed various studies. The understanding we've drawn from that is that the data shows that we're reaching the right target audience, which is adult smokers. Former smokers and never smokers show a very low interest in using the product, and that's been reinforced by real-world data in Japan. We're able to monitor the product sales in Japan.

Mr Powell : For the record, perhaps I could table this document, 'Product acceptance and usage of IQOS', which I think is our most recent public data related to the usage and acceptance of IQOS in Japan. On the second page—and I'm sorry to be speaking to you about it before you have a copy of it—you'll see that in Japan the rate of conversion from adult smokers is very high, at around 80 per cent conversion. There are very low rates of uptake by either nonsmokers or former smokers, at one or two per cent in those relevant categories. And interestingly, on the last page, it is replacing cigarettes in the sense that total tobacco volumes in Japan continue to decline with the long-run trends—that is, people are converting from smoking cigarettes to heated tobacco, yet the same rate of reduction of tobacco consumption continues as existed in Japan before, and I think that's quite important to note.

Mr TIM WILSON: You made a quick reference earlier to the types of regulatory environment you thought were desirable. You referred to New Zealand and also to Japan. Is there a regulatory environment that Australia should look at in terms of how to manage the health risks as well as the commercial factors?

CHAIR: And as a supplementary to that, we have probably most frequently been told that New Zealand, maybe because it's the most recent and has therefore learnt from the past, is developing the world's best model, if I can put it that way. So, I'm interested in whether you think that would work in Australia.

Mr Powell : I guess I would like to take it from the beginning and talk about some general principles. The last page of that pack we shared with you at the beginning has reference to some regulatory principles, and indeed our submission has a slightly additional list. I think it's important—and from hearing some of the discussion with witnesses earlier today over the internet—that the regulatory regime is to acknowledge that cessation of the consumption of tobacco altogether should still be a primary driver of a policy that government establishes. That said, for those who have not quit—and obviously in Australia we've had harm reduction products in the country for 30 years or more, NRTs in particular, yet we still have three million smokers in the country—I think it's important that other products that allow additional people to stop smoking are important and that a regulatory regime should encourage that as well. To do that, communication is necessary. And when I say 'communication' I don't mean television advertising, but people need to understand that there are other products out there that are better for them. And if they cannot quit tobacco entirely, or nicotine entirely, then they should be aware that there are NRTs, e-cigarettes and heated tobacco. Indeed, we've seen that in the United Kingdom with their 'Stoptober' campaign, promoting the use of e-cigarettes.

So, with those kinds of regulatory principles in mind: you mentioned New Zealand, and I referred to the United States; they are both regimes that were born of, I think, the political concern raised by some of the previous witnesses who are not in favour of tobacco harm reduction or e-cigarettes and personal vaporisers. They established a regime to set a bar over which people must produce evidence that the products are safer, and to a reasonable extent prove that they don't have the negative consequences that people are concerned about. That is a process that we are currently going through in the United States.

The US approach is probably the most rigorous, but, for government, a decision would need to be made in order to meet that process. That is for all products, by the way; even cigarettes need to establish that they are at least no more harmful. Then there is a further process to make claims and think about what you might be able to communicate. But they've had to hire 400 tobacco scientists in a very large bureaucracy to enable people to process that. Our submission was two million pages, and it is growing. The capacity is needed to consume that information. If Australia were to look at the US approach, I think it could deal with a lot of those political concerns and health concerns that have been raised. I think that could be very comfortable. But we would need to acknowledge that in establishing such a regime we are going to be creating a substantial new health bureaucracy.

New Zealand have also looked at that. Their first decision on e-cigarettes was simply to legalise them and make them available. There is not going to be a threshold mechanism for that. The New Zealand cabinet paper that was released is quite clear about what they are proposing and what the government will introduce very soon. Their second related decision was to establish a regime that is analogous to that of the United States that I have already described. One interesting feature is that they said that they would accept the decisions of like regulators. For example, New Zealand would accept the decisions of a regulator such as the FDA. Those are interesting considerations. I think the previous witness mentioned that, if you create a very high regulatory barrier, while it provides comfort around the risks it also establishes costs to enter and comply for people who want to enter into the market and that therefore impacts on the number of people who may be able to access, provide and sell these products. I think those are all considerations you would want to take into account.

In the United Kingdom where they have the greatest—

CHAIR: We are up against the clock at this point, so I invite you to conclude your remarks and maybe put some structure around those comments about the three regulatory systems for us to take on notice.

Mr Powell : Certainly.

Mr TIM WILSON: Am I able to submit extra questions on notice?

CHAIR: Yes.

Mr Powell : We would be happy to take those.

CHAIR: Thank you for your evidence today. You will be provided with a Hansard transcript of today's proceedings. If there's anything you would like to correct or add, you can contact the committee secretariat. Also, can you provide that additional information taken on notice by 19 October, preferably. Thank you for your time this afternoon. I ask the committee that the three documents that were provided be admitted as an exhibit to the inquiry and similarly that the material provided by the Australian Taxpayers' Alliance be admitted as an exhibit to the inquiry. That is so moved. Thank you all very much for your attendance today. I look forward to seeing you at a future hearing.

Committee adjourned at 14:33