R.J. Reynolds, British American Tobacco Sign Vapor Technology Deal

WINSTON-SALEM. N.C. — R.J. Reynolds Tobacco Co. has signed a technology-sharing term sheet with British American Tobacco (Holdings) Limited (BAT).

The agreement provides a framework for collaboration and mutual cross-licensing of vapor product technologies through 2022. Specifics of the agreement have not yet been finalized by the companies, but the term sheet is the first step in reaching a definitive agreement under which R.J. Reynolds and BAT will collaborate to develop next-generation vapor products.

The companies' collaboration will include a process for joint research and development activities, and cooperation on regulatory, scientific and manufacturing issues related to vapor products. R.J. Reynolds and BAT continue to negotiate the specifics of their agreement, with a goal of reaching a definitive contract by the end of 2015.

"This proposed technology-sharing agreement makes great business sense as we lead the transformation of the tobacco industry, allowing us to continue to deliver innovative, high-quality vapor products to adult tobacco consumers seeking smoke-free alternatives," said Debra Crew, R.J. Reynolds' president and chief commercial officer.

Based in Winston-Salem, R.J. Reynolds Tobacco is an indirect subsidiary of Reynolds American Inc. (RAI). Its brands include Newport, Camel, Pall Mall, Doral, Misty and Capri.

"We believe this strategic framework could ultimately have a significant positive financial impact, particularly for RAI, since RAI's licensing arrangement with BAT allows RAI to participate in the global e-cigarette category, which we continue to anticipate will generate significant growth and profits," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC.

According to Herzog, by joining forces and leveraging each other's strengths, these two companies will likely accelerate the pace of e-cigarette/vapor/reduced risk products' growth on a global basis. More importantly, she said, they will be able to more successfully engage with regulators both in the United States and internationally.

She added Wells Fargo Securities has "long believed" the two tobacco companies would formalize an agreement that should accelerate their reduced-risk businesses and help grow the category globally.

"Ultimately, this sets the stage for RAI/BAT to work towards establishing global market leadership in reduced-risk tobacco products," Herzog said.

In addition to the pact with Reynolds, BAT has reached an agreement to acquire CHIC Group, which has 800 points-of-sale in Poland, a dedicated e-liquids production facility, a modern research and development center and leading Polish e-cigarette brands.

"Acquiring the CHIC Group is strategically significant and makes commercial sense. It provides BAT with scale and market reach through Europe's largest e-cigarette retailing network, as well as important manufacturing and R&D capabilities. It further demonstrates our commitment to the [next generation products] category," said Kingsley Wheaton, managing director of Next Generation Products at British American Tobacco.

The pairing of R.J. Reynolds and BAT comes about two years after The Altria Group Inc. and Philip Morris International (PMI) teamed up to establish a framework to commercialize reduced-risk products and electronic cigarettes. Those two companies expanded their agreement to include a joint research, development and technology-sharing agreement this summer, as CSNews Online previously reported.

As a result of the pact, it is believed that PMI's candidate products would be regulated in the United States as Modified Risk Tobacco Products (MRTPs) and any commercialization would be subject to Food and Drug Administration (FDA) authorization.

PMI expects to apply to the FDA during the course of 2016 for one of these two candidate reduced-risk products, its heat-not-burn iQOS product, to be approved as an MRTP, as CSNews Online previously reported.