Zyns, Vapes and the Very Weird Market for New Nicotine Products

28:44And so all new products that were brought to market would need to submit what's called a PMTA to the FDA. And then the FDA would review that and say, is this suitable for the protection of public health? If it is, they will approve it and you will be able to continue selling this product. Otherwise, they will give you what's called a marketing denial order, which means that you cannot sell your product in the United States. Now, there was a grace period for products that were on the market before 2016. So that includes our products, that includes Zinn, that includes Juul. So all of these products, They still had to file the PMTAs, but they had a grace period where they could continue to sell while the FDA approved and reviewed those applications.

29:31Now, so if you want to start a product now, you cannot sell a single unit in the United States until the FDA gets back to you with your application. So to your question of you want to start a pouch company. We just can't. If you wanted to do it legally, what you would have to do is you'd have to raise some money, develop your product, run a whole battery of tests, including stability tests, which could take a year because you need to wait around to see if the product is different at month 12 than month one. Then you submit that data and the huge packet. It's thousands and thousands of pages to the FDA.

30:08They review it. You're at the back of the queue. This could take tens of millions of dollars. There's rumors that bigger companies have spent hundreds of millions of dollars on these applications. And I mean, Zin's been on the market since 2014. I'm not exactly sure when they submitted their PMTA, but it's been five, six years since PMTAs first were submitted. The FDA is prioritizing vapes first because of the vape crisis, which we'll go into about Juul. And they're also organizing based on market share. So theoretically, Zinn should be the first oral product that they review. And so your new pouch, the, you know, the odd lots pouch, that's going to be at the back of the queue.

30:53And so it could be three, four or five years. No one really knows, but it requires a lot of time. Now with the Juul story, there are a bunch of fascinating things with that that we could go into. Essentially, they were on the market before 2016. So it was legal for them to sell that product. It got really, really popular 2018, 2019. Around that time, we have the vape crisis, EVALI as it's known in the industry. And there were, I think, dozens, if not hundreds of deaths that were attributed to acute lung injury from vaping or e-cigarette use. Now, the CDC came in, studied everything. It turned out that it was related mostly to these marijuana, cannabis vapes that had the vitamin E acetate ingredient.

31:44No one's ever proven that Juul killed anyone. I don't think that they did, but that's conjecture. Nevertheless, there was kind of a panic about two separate issues. One was people in the abstract were dying from vapes as a class of product from the vitamin E acetate. And then separately, underage users were adopting Juul's in mass. And so before Juul was introduced, about 20 % of underage kids were using vapor products. And within a few years of Juul being on the market, that number climbed to almost 40%. And so this data is collected through what's called the NYTS, the National Youth Tobacco Survey.

32:31So pediatricians across the country are required to ask kids when they come in, I think it's 13 to 18. They ask them, have you used nicotine products? They ask a lot of questions, but this is for tobacco specifically. They ask, have you used nicotine products? What products have you used? Have you used over the last 30 days? Have you ever tried this product? Have you smoked? What brands? They ask all these different questions. It's all compiled into this great data set that then is used for regulation. And so the e-cigarette numbers were spiking. Now, cigarette use was declining, which is great.

33:04We don't want underage kids smoking, but we also don't want them using nicotine at all because until you're a full grown adult, your brain's still developing. And most importantly, if you start using nicotine at 15, 16, you're going to be addicted forever. It's going to be something that's very ingrained. It's the same thing with gambling. It's the same thing with drinking. like the underage. There are reasons we have age restrictions on all of these things. Now, fortunately, the industry has moved forward in many ways and tobacco is now 21 plus. It's kind of crazy to think that back during the Juul craze, you could just ask like a cool senior to go out and buy you Juul legally on their lunch break.

33:43Now it's 21 plus, which is, I think, much better. But obviously people are still worried about bleed over because there are 18 year olds with fake IDs who can figure out how to get something that's 21 plus. And if you look at the underage alcohol use rates, that's something like 50%. And same thing with cannabis, it's something around 50%. And so Juul received, because of all this pressure, they were fighting with the FDA, they were submitting their products, and they got into this battle with the FDA, who at that time was run by Scott Gottlieb, Trump appointee, former venture capitalist at NEA, very, very sharp guy.

34:21But he was kind of warning them that, hey, this is getting out of control. You need to do something. And then they took money from Altria and kind of got in bed with Big Tobacco. Duel was, they had a lot of kind of weird marketing stuff in the early days that came out. Stuff like visiting schools. And then also they were like, they had a sister company that was originally part of their company that was selling cannabis vapes, which is kind of crazy. What a weird time. Just like thinking back. It's just like it doesn't. The schools thing is crazy. There's a good documentary on Netflix. Basically, like they went into schools and they're like, don't vape kids.

34:58And then everyone went out and vaped. It seemed very strange. I was shocked by it. Yeah. Yeah. It was it was very, very poorly executed. And yeah, they just made a ton of mistakes and they became kind of the the tall poppy.

35:16the sacrificial lamb for our society for the sin of underage nicotine use. They became somewhat of a scapegoat in my opinion because after Juul was quote unquote banned. Now, what actually happened was they received a marketing denial order from the FDA. The FDA essentially rejected their PMTA. That meant that they needed to stop selling their products nationally. and they'd actually already stopped selling flavored products. So the mango jewel pods that were so popular, they had voluntarily pulled those off the market. They've still kept those off the market voluntarily. They legally could sell those, but jewel got a stay of the marketing denial order in the courts.

35:57So they were able to continue selling. And if you look at jewel's numbers, they're still doing about a billion dollars in sales and they've never really stopped doing a billion dollars of sales because they were only off shelves for a couple weeks while the marketing denial order was in effect it got stayed in the court and then most recently it got reversed because now they're not the biggest problem and it's interesting if you look at the some of the social media posts that announced the jewel ban quote unquote yeah the comments are all from former jewel users like former kids that used it joking about like why are they banning Juul?

36:36Don't they know we've moved on to Elf Bar and all of our favorite products? And that's where we get into the story of the new disposable market, which is now the second largest class of products after cigarettes.

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38:15And you could get LTE business internet starting at$39 a month when paired with select business mobile plans. That's unlimited data for unlimited business. There we go. Get the internet you need at the price you want. Verizon Business. Starting price for LTE business internet, 25 megabits per second, unlimited data plan with select Verizon business smartphone plan savings. Terms apply. Talk about what Elfbar did or is doing that is different to Juul. It's hard to explain exactly what Elfbar is because it's kind of a hydra of companies. Like the IP has been sold so many times. They've rebranded a million times.

39:01There's also Puff Bar and Puff Stick. And essentially what these companies do broadly, I'm not speaking about any particular company, but broadly the strategy has been to instead of engage with the FDA directly and file the PMTA, wait for approval, then market your product. They've just said, let's push this product as many places as possible. get it into every independent store that maybe doesn't care about the regulatory status of these products. Let's just flood the market with these products. And if we get shut down, what's going to happen is that we're essentially just have a front company that's just a couple random American citizens that are acting as a front for us in the US.

39:44The FDA is not really going to be able to shut them down. They're going to try and shut us down at the ports. All we need to do then is just set up a new company structure and import under a different label so that's how you see the evolution of these things where like i don't even think elf bar is on the market anymore i think it might be called like elf tech yeah no there's like a but they all look the same under like different names and i'm like is that exactly so they're all made in the same shenzhen like the the core company behind elf bar is shenzhen i miracle company which is hilarious name um but it's like like Miracle, but then also I, which I think is like an Apple reference.

40:22It's very convoluted. But the Shenzhen I Miracle Company, they have a massive facility where they make this stuff and then they just find a new front man. And I get emails every single day from a new random Gmail account that says like, puff bar, 500 puffs, like, would you like to white label this? Because they're looking for someone that has American citizenship distribution lines and can order their products and then get them into stores. And so they're really, it's not just like a normal spam campaign. It's very sophisticated. It always gets through Gmail spam filter for me. And I finally created a filter that actually cut them out, but eventually this is the game that they're running.

41:05And so if you look at the stats, the leading disposable vape company might be doing$100 million in sales or$200 million in sales. So they don't have anywhere near the brand awareness as a Zin, which is doing$2 billion in sales. But if you think of them as this aggregate Hydra, then it is a massive, massive category. And so the fundamental reason why this is happening is because the Center for Tobacco Products at the FDA, this is a new organization. I mean, they only got authorization via the Tobacco Control Act in 2009, and they really only been super active in 2016. And then, of course, in 2020, the FDA had to completely pivot the entire organization to dealing with COVID.

41:49And so resources have been tight. and so even though they have the ability to review pmtas and issue marketing granted orders or marketing denial orders they don't necessarily have enough field agents to go to every store in america and make sure that all the stores and all the products on the shelves are legal and approved and they so they can kind of do stuff at the ports and they can that's what i was going to ask like why don't they why don't they stop it at the import stage i mean my experience of shipping goods from Hong Kong to New York is that they go through everything, right? Like you can't have medications, you can't have food.

42:27Agents will stop and go through boxes or at least sample the boxes. Why don't they stop them there? Yeah, so they try, but it's very difficult because if the hold at the port is for one company's name and it's under a different company's name, it can be very hard to get through. The FDA hasn't really figured out how to create a blanket ban on everything that is a nicotine-containing disposable device. And some of them might be legal. Some of them might have been on the market before 2016. They might have PMTAs in. I don't know. I'm sure that there's some disposable company that's taking things very, very seriously.

43:06And they shouldn't be blanket banned at the ports necessarily. This is so fascinating because I actually, I once wanted to do, we should do like an Elf Bar episode. And part of the issue is we couldn't find a guest because like, it didn't seem like anyone even understood this company and what it is. Oh, it's really, really hard. It's really, really hard. The story is crazy too. Yeah. I mean, the Puff Bar story is potentially more interesting because there's a Wall Street Journal article about the founders and there are these guys who people, they kind of came out of nowhere and they didn't have the same story as like adam bowen and james wants it but they're like they're pictures on their instagram of them like driving ferraris and mclarens on like the freeways and it's like these guys are balling and then they got you know shut down but there's a whole bunch of rumors swirling in the industry about oh like what exactly happened there did they just like take the money and run but like it's not like a traditional startup where oh yeah there were investors and then they sold the company it's much more like they they made a bunch of money and they ran with it or something like So we just have a couple minutes left and I just want to, you know, the actual business of the pouches.

44:17So let's say Tracy and I, we want to start our nicotine OddLots branded pouch. OddLots. Right. ZodLots. ZodLots. Yeah, we got to start it with a Z, like a Z-mon salt. Setting aside all the regulatory issues, is there like a Taiwan semiconductor for pouches that I just like, we give them our brand? Do we give them our flavors and they make it? Like walk us through the manufacturing supply chain. I was joking with you about Helsingborg, Sweden is kind of the Taiwan of nicotine pouches. Zinn, of course, is a Swedish match product. Swedish match is a former matchmaking company. They literally made matches to light cigarettes.

44:57And then over time, once cigarettes started declining, they needed other products. And Sweden adopted these smokeless oral nicotine pouches. It's been incredible for getting Sweden smoke-free. There's a bunch of incredible data about how Sweden now has the lowest lung cancer rates in all of Europe. But there isn't necessarily a TSMC in the sense that there's not one scaled co-manufacturer that everyone is using. Zinn, of course, has their own facilities. They have a number of facilities. And they just this week announced that they're investing, I think,$600 million in a Colorado facility. They already have an American facility as well as several others across the globe.

45:38It's not an incredibly complex process. It is just at the end of the day, blending up six or seven ingredients that are powders and then they need to be dumped into a bag. We have a slightly more complicated process with our breakers product because we put a capsule in the pouch. And so the history of these products is that it used to be people would just chew loose leaf tobacco. Then it was ground up tobacco. This is the dip spit cup that you've seen probably the baseball players. Eventually, Swedish Match and a couple other companies took the ground up tobacco product, put it in a pouch. That's where you get general snooze, camel snooze.

46:23And snooze became very popular, especially in Sweden. Now, the modern oral category that we've been talking about, the Zins of the world, the Velo's, the Rogues, the Lucy's, they don't contain any tobacco leaf whatsoever, which is great. It's a huge step forward. But the problem has always been that tobacco leaf, although it did contain carcinogens, it also contained moisture. And so a Snus product was generally more moist. when you take out the tobacco leaf, you take out the moisture. And so the number one complaint that we found was that these tobacco-free pouches, they would dry your mouth out.

46:59And so we put a capsule that has liquid inside in the pouch. Oh, this is the breakers, right? The breakers, yeah. And so it's somewhat similar to a Camel Crush, the cigarette, where you crush the capsule and it releases flavoring. Same idea, add the flavor and moisture back into the pouch in order to kind of give all the benefits of the moist pouch that oral tobacco users enjoyed without adding back any tobacco leaf. And so that's a little bit more complex for us because we actually have to have a machine that drops a little capsule into each pouch and then seals the pouch. And And sealing the pouches is very tricky.

47:41You can see that some brands, when you open up the tin, it's just powder everywhere. It's a little bit of a mess. But in general, you know, these products are fairly easy to scale. It's much less complex than vapor products, which essentially... Less complex than semiconductor manufacturing, for sure. Certainly less complex than semiconductor manufacturing. I mean, Juul's tagline was like the iPhone of vaping. And obviously, there is literally a semiconductor in a Juul. There is not a semiconductor in any nicotine pouches. Now, these disposables, they've gotten so cheap that you can buy one that has an LED screen or LCD screen on the outside and it shows you all these things.

48:23It's crazy. But it is a simple process. But there hasn't been major concentration in the co-manufacturing space because most of the big tobacco companies have wanted to make it themselves. Setting aside the very opaque world of Elf Bar, what is raising financing like for something like a Lucy Goods? Because I can see on the one hand, okay, maybe you could make a sort of health argument where at least you're arguing that like this is a product for people who are addicted to cigarettes to try to move on to something that has fewer side effects. But on the other hand, I have to imagine that anything with the word nicotine in it, there's probably some wariness and there's probably investors out there who are very, very worried about being perceived to be getting people hooked on an addictive substance.

49:14So what is that like? What do you what do you do when you go out to investors and what are the concerns that they have there and who do you actually raise money from? Yeah, it's been it's been tricky. There's a lot of venture capital firms that have what are called vice clauses in their limited partner agreements. And a lot of those vice clauses are very broad. They say things like no weapons, no drug products, no sex products, these types of things. Now, over the years, there's been a kind of a steady flow of companies that have kind of defied those vice clauses. Anderle is a famous example in the defense space where a lot of venture funds went back and revisited their vice clauses because they kind of realized that they were written in a blanket way.

50:01And I think the vice clause broadly is kind of a mistake for venture capitalists to lean on because it doesn't allow them to actually engage with the moral question of what is the impact of this company. You know, it would be crazy if a VC said, hey, we have a fraud clause. We will never invest in a fraud. It's like, obviously, that's the case. But it's incumbent on the venture capitalist to assess the fraudulent nature of the business and avoid investing in an FTX or a Theranos, right? And the same process should be run for quote unquote vice companies. And that should allow you to determine that maybe Anderil is a good company and is doing a positive thing for the world, even though, yes, it would trigger a traditional vice clause.

50:52More broadly, I think that the driver of decision to invest in something like this is that this is such a narrow market in the sense that if you're investing in B2B software, there's a new unicorn every six months. there's a new unicorn in the nicotine space once a decade, maybe, and rarely. So even if you are an investor and you see something that's promising, it's not really something that you can build a career around where, oh yeah, you were the first investor in Juul. And so you get all the deal flow for the next 10 Juuls. That doesn't happen. Whereas that certainly does happen in B2B software.

51:34And so I think the bigger difficulty has just been with the market structure. and the desire of venture capitalists to participate in this particular industry, because it's not something that's a goldmine that you can just, you know, build a whole career around. I just have one last question. You're, in addition to founding Lucy, according to your Twitter profile, you're an entrepreneur in residence at the Founders Fund. Peter Thiel, you mentioned Thiel earlier when you were talking about Soylent. In Zin Culture, I think there was an article that all of J.D. Vance's staffers are big, are big Zin consumers.

52:14I know this is like a blanket statement. It certainly doesn't nearly encompass every nicotine user at all. But just from your perspective, how would you describe the synthesis of nicotine consumption in conservative politics more broadly? Oh, it's really hard. I think it's probably something around the edginess that comes with saying something like nicotine is not bad for you. It's kind of this secret that people love to learn about. They don't want you to have this chemical. Exactly. Exactly. And so it's very countercultural. And if you poll people broadly, people believe that nicotine is what causes cancer in cigarettes.

53:00And that's actually a misconception. And that's why if you look at a tin of Zin or a tin of Lucy, the warning just says this product contains nicotine. Nicotine is an addictive chemical. Whereas on tobacco products, it says this product causes cancer. And also you can look at the California Prop 65, is that it? That lists cancer carcinogenic products. They say everything causes cancer in California. Basically, but not these nicotine products. Oh, interesting. Which is like, you know, notable, I think, because obviously California is a very careful state as they should be with this stuff. I think that might be part of it.

53:39The other part of it is if you look at the lineage of where oral tobacco has been popular, the baseball players and the hockey players that were dipping in the 90s and early 2000s, that tends to be a more red state phenomenon. on. And so the earliest adopters, it's always hardest to get someone to switch form factors. It's easy to get someone who's already using a tobacco pouch to use a tobacco free pouch because it's fundamentally the same shape of product in their pocket, the same feeling in their lip. It's much harder to get someone who's maybe vaping in a blue state to switch over. although obviously it's happening now.

54:28I really hope that it doesn't become a culture war issue or that culture war issue subsides because we don't want to wind up with a situation where all of a sudden smoking becomes important to the left and we're seeing Democrats drop dead because of some protest of Tucker Carlson. Like, who cares? Like, it's not important. Like, this is so much, the stakes are so much higher than, you know, avoiding an association with, you know, a right wing firebrand. And we've seen something similar with the menthol cigarette ban where Biden, the Biden administration rolled back plans to ban menthol cigarettes and the NAACP condemned the White House for that action because it was seen as kind of a cynical play for votes.

55:16And realistically, realistically every single demographic or political leaning needs reduced harm products. They need options that are down as far down the continuing risk as possible. So I don't know, maybe the answer here is that we need to, we need to make the, like an ultra liberal, uh, the left, the left coded, the left. Yeah, I don't know who the Tucker Carlson of the left would be. Maybe we could get Jon Stewart to promote it or something. But I mean, in general, our plan at Lucy has been, you know, to sponsor podcasts on both sides of the aisle. And, you know, we don't take a firm stance politically because the issue is just so much bigger than that.

56:02And the political lines do not align around the harm that cigarettes are causing. John Coogan, co-founder of Lucy Nicotine. Thank you so much. So many questions. I had been curious about this space answered there. So really appreciate you coming on OddLot. Yeah, that was so interesting. Yeah, thanks for having me on.

56:32First of all, that was really fascinating about the Elf Bar, which the whole thing is so weird to me. that like here's this regulated uh philip associated company jewel that like that sort of went off the market for a while and then we just got flooded by cotton candy made in uh china consumes more resources and ends up like taking up more space in landfills i see disposable vapes on the street all the time and as you mentioned there's like semiconductors in there and like all this stuff and batteries and everything it just gets thrown away that's crazy it's also just this weird like gray market where if you walk into stores in new york like the elf bars are kind of hidden away like behind the cash register but everyone knows that they're there and like clearly no one's really cracking down on them now there is so much um to pull out of that conversation um one thing that i thought was really interesting was like just the different pathways the sort of like pre-market tobacco pathways.

57:32I hadn't realized that there were all the, I mean, I guess it makes sense, but I hadn't realized that you had to make a decision about that so early on. And then the other thing that I thought was really interesting was John was talking about how they saw regulation, basically a regulated space as an additional moat. So something that was desirable from a business perspective and that's why they targeted it. No, that is super interesting. And when you think about like, okay, you have to get in the queue and you have to do this testing or the fact stability testing. So even after you design the pouch or the gum, you have to make sure that it's the same.

58:09Got to keep it on the shelf. Yeah, shelf stability. That's interesting. And then this application and then there's this Q. Interesting that he mentioned COVID sort of obviously and probably for good reason, taking resources away from some of the health regulators who had higher priorities than approving nicotine pouches there in 2020. Just lots of really interesting details about how we got to this state of the market. You know, the other thing I'm kind of wondering is what the distribution network for elf bars looks like now. And how, like, maybe we need to find someone with a bodega and ask them, like, how do they get elf bars in the first place?

58:48Yeah, that's a good question. We should just find any of them. We could just walk into some of them and ask them if they'll come on. I also think it's funny, the Helsingborg Sweden has, like, the Shenzhen or the Taiwan of nicotine powders. It's interesting. I hadn't thought a Swedish match started off as a match company. Did you know, speaking of... Very Ricardo Hausman coded thing that we learned. Did you know, speaking of international tidbits about this particular topic, what's the only country, I think this is still true and up to date, but the only country to have banned cigarettes entirely?

59:30No. Bhutan. Oh, the happy country. Yeah. And I think it failed terribly because it just started a black market in cigarettes and people were, you know, taking them over the border. And so I think they actually ended up reversing it. But kind of interesting. It really is. Like, I do think about that conversation from years ago with Lawrence Hamtel about, like, you know, when I was a kid, like, the things I knew is, like, cigarettes are really bad. Bad people smoke cigarettes. And also it seemed like they're going away. Like it's only a matter of time. But then you recognize that there's been a war against nicotine or tobacco for, you know, close to centuries.

1:00:08It's not going away. It'll just continue to evolve in different forms. They're never going to get rid of it. OK, well, on that Lindy note, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow John Coogan. He's at John Coogan. Follow our producers, Carmen Rodriguez at CarmenArmond, Dash O 'Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. For more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter.

1:00:45And you can chat about all of these topics. We don't have a nicotine room, but people will find a way to talk about it in the Discord, Discord.gg slash OddLots. And if you enjoy OddLots, if you want us to do a deep dive into elf bars, and the business model there, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is connect your Bloomberg account with Apple Podcasts. In order to do that, just find the Bloomberg channel on Apple Podcasts and follow the instructions there.

1:01:21Thanks for listening.

1:01:30Thank you.

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