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

Episode Date: July 29, 2024

Vapes like Elf bars seem to be everywhere now. Meanwhile, Zyn nicotine pouches have become a huge seller for Philip Morris and are in such demand that it's sometimes hard to find them in stores. So where are all these new nicotine products coming from? What's the regulatory approval process for these? And what is it like to launch a new nicotine product right now? In this episode, we speak with John Coogan, the former co-founder of dietary supplement Soylent and most recently the co-founder of Lucy Goods, which makes nicotine gum. We talk about the booming market for Zyn and other nicotine products, plus the byzantine ways in which some of these companies are structured. We also talk about the death of Juul and how we seem to have ended up with a very strange gray market for vapes.See omnystudio.com/listener for privacy information.

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Al-Away. Tracy, have you tried a Zinn yet? No, I've resisted. Multiple people, including you, have offered me Zins before, and I have so far resisted the temptation. But I don't know how long I'm going to be able to hold out. For those who don't, I guess there's some, there might be some people who don't know what a Zin is, actually, it occurs to me. It's a little pouch that people put under their lip on their gum and it's filled with tobacco-free nicotine salt. So it's sort of a smoking alternative or even a vaping alternative. And so people who want nicotine can get it that way. But there's also like this big culture of it.

Like Zin memes are everywhere now. Yes. And there have been times where it's been really hard to find them, right? Yeah, yeah. So first of all, they're made by Philip Morris, is my understanding. But then secondly, sales have jumped like, I can't remember the exact time frame. Hundreds and hundreds of percent. Yeah. And so there have been shortages of this product. And if you go, you know, online on certain subredits and places like that, you can see people actively trying to find where they can get zins. There's also a lot of other nicotine delivery products nowadays, too. There's obviously the vapes and elf bars. I had a, this is a slight aside, I had a green tea for. flavored vape type thing recently.

Yeah. How was it? It was great. And it made me feel so healthy. It's the only nicotine product that actually made me feel healthy. Do you remember, you know, speaking of nicotine, and I'm fascinated by nicotine, it always sort of goes in waves. I see cigarettes, once again, I go to party sometimes a lot of people are smoking. Do you remember the episode we did with Larry Hamptill years ago about us. So he made an observation about the history of nicotine that like there was some Russian czar in like the 1500s or something like that, who threatened to cut off the noses of anyone who consumed tobacco. And I guess that didn't work.

But it really shows that, you know, you have these like crackdowns and people get really anti-nicotine consumption. But it really just doesn't go away. Like nicotine, it's Lindy nicotine consumption. I feel like we should just caveat this entire conversation. Or at least I should with, you know. Don't do drugs, folks. I do not endorse nicotine consumption.

However, everything in the world is relative and on a continuum. And I can say when I was in high school in Japan, I used to smoke clove cigarettes. Like there were days where I would smoke like a whole pack of cloves, which is just insane when I think about it now. And so certainly relative to a pack of cloves, I feel better about some of these new nicotine products. The one that I kind of like, and we're going to talk about it now, is the gum. Yes, right, because Nicoride has existed for a while, but now we're seeing that more and more companies are doing it with different flavors and stuff like that. We are truly, again, nicotine is definitely having a moment right now. Yes, and beyond personal preferences and consumption, it is just a really interesting business.

Yes. So there are these new products being developed and sales of them have exploded in recent years. But then secondly, in the background, as with all nicotine and tobacco products, there's always the regulatory threat and what policymakers actually decide to do about these things and the health considerations and things like that. So it's just a really interesting industry to observe and talk about. Totally. And you know, you mentioned the Zin shortages, which are real because I've gone into stores and they just like don't have any, et cetera. but there are all these other like Zin competitors. There's Zemo. There's Zolt.

There's Rogue. Why do they all have Z in them? My guess would be, well, Zin exists. And so let's come up with a name that's sort of. But anyway, we're going to be speaking with the CEO and co-founder of yet another one of these nicotine pouches. Because I want to actually understand how this business really works. fact, it's the company that makes the gum that you like. Yeah, so the gum, the reason I found it is actually because you gave me a sort of industrial quantity of it for some reason. And so I have it stored

in a drawer at home. And yeah, by all accounts, its sales seem to be, you know, increasing. And so it is very emblematic of this new era of nicotine products. And we should talk more about what that business actually looks like. I am very excited. We, have indeed the perfect guest. We are going to be speaking with John Coogan. He is the co-founder of Lucy Nicotine, which is one of these Zinn competitors. They make the pouches. They make gums. They make something called breakers, which I don't really know what that is. I haven't tried yet. Maybe we'll learn. And they've been around since 2016. So long before the internet, the Zintternet became flooded with memes about all of this stuff, he was early on the, the

bandwagon, so to speak, or before there was even a bandwagon. And we're going to understand how this business actually works and why so many people are consuming this stuff. So, John, thank you so much for coming on, Oddlot. Thanks for having me on. What is nicotine culture? Nicotine culture has evolved a lot. But right now, I mean, I think the Zintrinet is a great portmanteau to describe it. It's certainly become a little fratty, a little broie. But that doesn't actually capture the broader nicotine user

because there are millions millions of nicotine users and the average smoker is you know a Gen Xer or boomer and they are definitely not posting Zen memes on Instagram but

that's certainly what's driving this new wave of consumers moving down the continuum of risk and moving away from cigarettes which I see as a very positive thing. So speaking of bros, you co-founded Soylent before co-founding Lucy. And I always thought of Soilent as the sort of, I think someone wrote this at some point, but the Slim Fast for Men. What was it about nicotine products that attracted you to that space? You know, going from

a company like Soilent and starting something new. It was a few things. So with Soilent, we just kind of stumbled into it. We were actually running out of money and hungry, and we needed a meal replacement to kind of help us stay healthy and provide for our food needs. And so we just kind of made this product. It went viral because we wrote this very, this very edgy blog post about how our CEO quit eating food for 30 days straight and lived on this exclusively. Yeah, yeah. And so it was the ultimate stress test. And so even though we were a new company and we couldn't show that, oh, we had 100,000 people consume our product, they all liked it. We were able to show that one person was able to consume it in the extreme. And so if this one guy can use this product for

30 days straight, you can probably have it for lunch or an afternoon snack. And so it went very viral. It was very controversial. But what we learned was that the market for meal replacement shakes and protein shakes was not oligopolistic or monopolistic in any way. We actually kind of learned this in a pitch with Peter Thiel where we went in to present the company and he kind of laid out how the market would evolve and explain to us that this would be a potentially a very good business, but not a venture backable business. Of course, we wound up not taking his advice and raising a bunch of venture money and the company didn't do that well because of that. But we learned that it was much more important if we were going to be consumer products entrepreneurs to go into products that

had moats. So in the nicotine space, there's a pretty significant regulatory moat. Yeah. And also take things much slower. So we've been in business for eight years now, raised a lot less money. We're much more profitable, much more cash flow positive. And we're trying to accumulate more brand power, more market power, more moats. And that's really what motivated us. Of course, there was also the personal need. My co-founder was quitting smoking. He didn't like any of the alternatives. It's kind of a classic story that you see in this category. And we thought that there was enough expertise among our team members to launch a product in a more regulated space. One of our co-founders is a PhD from Caltech and had worked in biotech and dealt with the

FDA on the cancer drug side of things. And so we knew that we could both work. work with the FDA, but still do all the standard e-commerce, shipping, Shopify, you know, make a product, sell it online, the blocking and tackling of getting one of these businesses working. So, as I mentioned, you know, I've tried, I've consumed Zin in my life. I've consumed some of the others because they're all over the place and often, you know, in Ziz and stuff. So I've tried them all. I'm going to be honest here, you know, pop one in my mouth from time to time. I have no idea what I'm putting in there. You know, it's like, oh, yeah, the case. There's no. tobacco, whatever. What's a nicotine pouch? What's in it? Like, what are, what am I, what am I sticking

up in my gums? Yeah, it's pretty, it's pretty simple. I mean, the, the goal of these products is really just to deliver pure nicotine and remove the tobacco and any of the nitrosamines or, or harm-causing agents as possible. Now, you can't, I mean, you could just take a vial of pure nicotine and drop a, like, a liquid drop on your gums, but that's a terrible form factor. It doesn't really work. So what these products have done, generally, speaking broadly, is they bind the nicotine to a, like a bulking agent, usually a cellulose. We use microchrystalline cellulose, which is essentially just you take a tree, you grind it up, you get wood pulp, you chemically treat that a little bit to get kind of a powder. And so when you're done with the pouch, you notice that even though you might not be

getting any nicotine from that pouch, there's still something in there. That's the cellulose. And then you also add flavors, maybe a sweetener. There's different things that you can do to increase moisture, adding different oils. But that's pretty much it. You want to keep the number of ingredients as low as possible because you only want to use ingredients that have been studied for years and years in the mouth. So when someone says, how do we know that oral nicotine is acceptable? Well, we can look at the data from Sweden. We can also look at what's happened with oral nicotine users in Nicorette for 50 years. And then what about cellulose?

Well, cellulose is used in a lot of products. Same thing with a lot of these flavoring chemicals. So you take these flavors and if they've been used in sodas for 50 years and they're not causing cancer, well, then that's a good case that you can go and make to the FDA that, hey, this flavor is also safe to consume. And this is really important because, as we saw during the vape crisis, the nicotine was not the principal agent of harm in the, it's called eVali, the e-cigarette and vapor acute lung injury kind of fiasco. What was going on was that there were a certain class of vapes that included vitamin E acetate, which was not safe to ingest into your lungs. And so that hadn't been tested.

So all of these companies, Zinn, every company in the space, wants to keep the number of ingredients as low as possible and only use things that have been studied for a really, really long time so they can go and make a really, really strong case to the FDA. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gura. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini.

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That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. What's the difference between Lucy and Nicorette, which you just mentioned? So there's a few differences from our gum. So we have a variety of products. One is a nicotine lozins. It's actually approved as a smoking system.

aid by the FDA. The FDA has a number of ways that you can bring a nicotine product to market. One is through the drug pathway. That's what Nicorette went through. So Nicorette is an approved smoking cessation aid. Our nicotine lawson is also an approved smoking cessation aid. So we can go and say, this product is proven to help you quit smoking. Our gum is, goes through what's called the tobacco products pathway, which is the pre-market tobacco application pathway. There's also the modified risk tobacco product pathway, which is MRTP. It's all very complex and there's a few different ways to bring products to market. But in terms of our gum, we have focused on differentiating around the brand.

We recognize that when my co-founder was quitting smoking, he noticed that Nicorette was working for him as a product. Ingesting nicotine orally was helping him not smoke. But when he pulled out a packet of Nicorette, everyone would say, why are you on this medicine? You must be a really, really bad smoker. So there was a lot of work to be done into destigmatizing nicotine gum and trying to make it feel less medicinal and more aspirational. And then we've done a lot of work on the flavor, texture, and strength side. So Nicorette actually in the United States, they sell a two milligram and four milligram gum.

internationally they do sell a six milligram gum we found that the six milligram gum worked very well and so in the united states we have also chosen to to sell a six milligram gum which is stronger and if you noticed what's going on in the pouch market zin sells a three milligram and six milligram product clearly six milligram and stronger products are more effective for getting for convincing smokers to switch and so we've been really interested in that but obviously there's obvious There are also risks that come with that because it is a stronger product. Setting aside the health questions about nicotine and so forth, how much are you seeing people consume any of these cigarette alternatives as a help to get people to quit smoking versus

someone who wants to consume nicotine and maybe was never a smoker in the first place? It's hard to say, I mean, we do survey all of our customers when they come in. and about a third of them are former smokers or directly, like the product that they used right before they ordered was cigarettes. Another third comes from e-cigarettes and vapor products. So that's the product that they were using right before. And then another third is basically people that are coming from other pouches. Like they've tried other brands and then they've come to us because they've heard of us. Ideally, it would be, you know, 100% cigarettes.

But it is very, very difficult to target smokers. We actually tried on Facebook in the early days. when we targeted people who were interested in smoking, there was a lot of overlap with people who enjoy smoking meats. I don't know if that's like a Zuck thing, but it was, but it was very, it's very tricky because if you are a smoker, it's not like you're following, you know, smoking pages on Instagram. You're probably just doing this in the background. And you can do some, some general broad level correlations between, oh, smokers tend to be into this type of thing. They tend to be in this age demographic. But it's, it's much harder to target.

then say, okay, someone follows this particular band. I'm going to try and sell them a shirt with that band on the shirt. It's very direct. It's much harder to target smokers. But obviously, like, everything that we do is focused on that because that's where the biggest impact for the mission is. But then also, smokers spend the most money on nicotine every year. So there's the strongest economic incentive to go after smokers. By the way, Tracy, there are more cigarette memes to these days.

some Instagram account that I think, you know, it's like cool people smoking cigarettes and stuff like that. So that's on the rise. Anyway, let's not do that again. Yeah, it's very edgy. Yeah, yeah, exactly. Yeah, it's very edgy. So people are starting to, you know, boy with that. Hestia cigarettes are like the really hip one right now that all the.

Yeah, yeah. I can't support that in anyway. Wait, so on this note, I mean, the amount of smokers in the world has declined dramatically. And if Lucy is, in theory, targeting people who are trying to stop smoking cigarettes, then is this, how is this a growth market for sales? Oh, it's a huge growth market. So just to give you some background, the nicotine market in the United States is $75 billion. $55 billion of that is still cigarettes.

So that's 72% of the total. Now, $10 billion is smokeless, which includes oral nicotine. But these pouch products, and I guess you would include our gum in this as well, that's only like two and a half billion, maybe three billion. The majority, like still the majority of smokeless nicotine is those traditional tobacco pouches you might have seen like dip or general snooce, those types of products, which oddly have a higher regulatory status with the FDA right now. British Match has two products, Zin and General Snooos. Zin has yet to be approved for PMTA, which is kind of like the level one approval. Meanwhile, General Snoose has both PMTA and MRTP, which allows them to say that General Snoose is less harmful than cigarettes, which is great because it probably is. And I agree with the FDA on that.

But it's just interesting that the FDA has chosen to kind of fast track General Snooose. I mean, it's an older product, so it's easier to, you know, run the data on. I suppose. And then e-cigarettes and vapor, that's a $5 billion category, but it's declining and it's declining faster than cigarettes. So over the last year, the cigarette market has declined by 5%, whereas the e-cigarette and vapor market has declined by something around 10%. And the decline in BAPE is actually accelerating. So just in the last month, it went down 16%. And so the way we see the market growing is that this $55 billion cigarette market, that should be zero.

Right. And it's getting there. It's 5%. And the declines are accelerating. So every year, there's something like a billion dollars of value that's up for grabs. And we're hoping that almost all of that goes to oral nicotine if someone is switching from smoking. But I guess what I'm getting at is, is there like a generational cliff risk where you mentioned baby boomers earlier? But where older smokers, you know, stop buying cigarettes.

all together, either because they age out of the market or because, you know, governments around the world have expressed desire to get people to stop smoking. And is that a risk for nicotine gum sales? Yeah, it could be in the sense that like the overall nicotine market could decline over the next 100 years. And we could be talking about, you know, in 2016, we could be talking about a U.S. market that's not 75 billion, but 25 billion. I think if you look back to the pre-cigarette era, humans were consuming nicotine, and I think that there will be a continued trend there just because of the way the nicotinic receptor has evolved in the brain and the desire for humans. I mean, Joe mentioned that nicotine consumption is Lindy in some ways, and I think that's right.

We just made a terrible mistake during the Industrial Revolution by building the cigarette rolling machine, which allowed us to ramp up the earning ash that we were inhaling to the point where people were smoking 20 cigarettes a day. But over time, we do think that there will continue to be some amount of ambient nicotine use. I don't think it'll ever be everyone. and you can just tell from talking to people that some people, nicotine, they really enjoy it, and some people don't get anything out of it. I have a lot of questions. I want to just get a, before we get it, I want to learn more about how these packs are assembled and market and sold.

But before we do that, I just want to get a slightly understand the regulatory environment for nicotine a bit more. If I start a pouch company, A, like, what do I need to do to be able to legally sell it? And then B, you know, I've been. wondering about this for a while and since you know the business i'm just going to ask you even though it's not pouch or gum related you know the fda went after jule and rapidly massively constrained what it's able to sell i think some of that's been actually loosened a little bit but then so they killed jule more or less and then you just saw this explosion of disposable vapes and those vapes

tastes like candy. I mean, Tracy mentioned the green tea ones, but they have ones that really taste like you're inhaling cotton candy. And they're disposable. People trash them all over the place. So there's got to be all sorts of like waste because what's ever in those batteries. So they basically opened the door to these candy flavored ones that are significantly more wasteful and they end up on landfills or in gutters and in sewers and something. How did that happen? And what was it that like the elf bar like from China or whatever was able to become massive even while Jewel was so heavily constrained? Good question. Yeah.

Let me give you a little bit of the prehistory here. And we can work. We can work up to the Jewel story. So cigarettes were unregulated for the entire 20th century. But in the 50s, 60s, 70s, Surgeon General Warning comes out. People start learning that cigarettes cause cancer. There's the master settlement agreement in the 90s where all of the tobacco companies came to create a settlement with the U.S. government. The basis for this was, you know, billions and billions of dollars paid to American governments, essentially because the tobacco companies were placing a negative externality on the health care system.

Yeah. And so that was, it wasn't, it wasn't a necessarily like a moral judgment, even though you could argue that it should have been. It was you are causing cancer, which is putting stress on the health care system, so you need to pay the government for that cost. And then after that, there were a lot of restrictions mostly on advertising, so mostly FTC related, now an FCC related. Now, later in early 2000s, the vaporizer is invented by this guy Hans Licks in China. and a company called ENJY starts building really popular e-cigarettes for the United States.

These get popular and the FDA wants to regulate them. The FDA makes a claim that Enjoy is a combined drug and medical device product and it's delivering nicotine for the purpose of smoking cessation, which is or cigarette addiction prevention. So cigarette addiction is a disease and this product was designed to relieve that disease, which makes it a drug and medical device. That case went all the way to the Supreme Court, and Enjoy actually won.

So the FDA lost, and the Supreme Court said that the FDA could not regulate e-cigarettes. Shortly after, this didn't make any sense. So Enjoy actually went out of business because they had a whole bunch of import restrictions while they were fighting this case. So they went bankrupt. Eventually, a hedge fund guy bought the company, turned it around, and they just got approved. And now it's a multi-billion dollar company. But the Obama administration in 2008, 2009, passed the tobacco control act, the TCA. This gave the FDA regulatory authority over all nicotine-containing products, essentially. Now, the FDA, they have a number of regulatory sub-organizations within the overall organization. So there's drug, medical device, there's veterinary, there's biologics, there's a whole bunch of different, there's supplements, you know, the protein powders that you get. And they all regulate things slightly differently. The tobacco group was new and they took some time to spin up. So by 2016, they had put into place what's called the pre-market tobacco application process,

the PMTA. And 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 Jule. So all of these products, they still had to the PMTAs, but they had a grace period where they could continue to sell while the FDA approved

and reviewed those applications. Now, 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, 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. They 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, you know, it's been five, six years since PMTA's first were submitted. The FDA is prioritizing vapes first because of the vape crisis, which we'll go into about dual. 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, you know, the odd lots pouch, that's, that's going to be at the back of the you. And so it could be three, four, five years. No one really knows, but it, but it requires a lot of, a lot of time. Now, with the jewel 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, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the 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. No one's ever proven that Jewel 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 Jules in mass. And so before Jewel was introduced, about 20% of underage kids were using vapor products. and within a few years of Jewel being on the market, that number climbed to almost 40%. Whoa. And so this data is collected through what's called the NYTS, the National Youth Tobacco Survey.

So 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. We 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 jewel craze, you could just ask like a cool senior to go out and buy you Jewel legally on their lunch break. Now 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 at something like 50%. And same thing with cannabis. It's something around 50%. And so, Jule 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. But 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. Jewel 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, think 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. And then everyone went out and vape. It seemed very strange.

I was shocked by it. Yeah. Yeah. It was very, very poorly executed. And yeah, they just made a ton of mistakes. And they became kind of the, the tall, copy, the, you know, the, the, the, the sacrificial lamb for our society for the, for the sin of underage nicotine use. They became somewhat of a scapegoat, in my opinion, because after Jewel

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. So 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 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 why are they banning Jewel? Don't they know we've moved on to Elf Bar and all of our favorite product? 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. I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed

to everyone from heads of state to fashion icons about the news of the moment. But I've always been curious who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. Talk about what Elf Bar did or is doing that is different to Jewel. It's hard to explain exactly what Elf Bar 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. There'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 U.S., the 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 or something. Yeah, no, there's like a, they all look the same under like different names. And I'm like, is that an Elf bar? So they're all made in the same Shenjin. Like the core company behind Elfar's Shenjin i Miracle Company, which is hilarious name. But it's like miracle, but then also I, which I think is like an Apple reference. It's very convoluted. But the Shenjin I Miracle company, they have a massive facility where they make this stuff.

And then they just find a new frontman. 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, like, this is the game that they're running. And 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. And 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, the shelves are legal and approved. And so they can kind of do stuff at the ports and they can, that's what I was going to find.

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. Agents 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 whole. 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, you know, is a nicotine-containing disposable device. And some of them might be legal. You know, some of them, 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. And 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 guess 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. Just your

answer. The story is crazy too. 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 out of nowhere and they didn't have the same story as like Adam Bowen and James Watson's but they're like their pictures on their Instagram of them like driving Ferraris and McLaren's on

like the freeways and it's like these guys are bawling 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 made a bunch of money and they ran with it or something like that. So we just have a couple minutes left and I just want to, you know, the actual business of the pouches. Like how to, so let's say Tracy and I, we want to start our nicotine oddlots branded

pouch. Odlots. Right. Zodlots. Yeah, we got to start it with a Z like a Zmo and salt. Setting aside all the regulatory issues. Is there like a Taiwan semiconductor for pouches that I just like, we? We give them our brand.

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. And 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 TSM 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. It'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 be. 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 snooos, camel snooos, and snooos became very popular, especially in Sweden. Now, the modern oral category that we've been talking about,

the zins of the world, the veloes, the rogues, the looses. These 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 snooose 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. And 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 sealing the pouches is very tricky. You can see that some brands when you open up the tin, it's just powder everywhere. It's a little bit of a mass. 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, Jules' tagline was like the iPhone of vaping and, and obviously there's a lot, there is literally a semiconductor in a jewel. There is not a semiconductor in any nicotine pouches.

Now, 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. It's crazy. But it is a simple, 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 weariness and there's probably investors out there who are very, very worried about being perceived to be getting people hooked on an addictive substance. So what is that like? What do you do when you go out to investors and what are the like concerns that they have there and who do you actually raise money from? Yeah, 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, no weapons, no, 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. Anderol is a famous example in the, 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. And 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 Anderol is a good company and is doing a positive thing for the world, even though, yes, it would trigger a traditional vice clause. more 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

you can build a career around where, oh, yeah, you were the first investor in, in jewel, and so you get all the deal flow for the next 10 jewels. That doesn't happen, whereas that certainly does happen in B2B software. And so I think the bigger difficulty has just been with the market structure and the desire of venture capitalist to participate in this particular industry because it's not something that's a gold mine 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 and residence at the Founders Fund. Peter Thiel. You mentioned Teal earlier when you were talking about Soylant. In Zinn culture,

I think there was an article that all of J.D. Vance's staffers are big, are big Zin consumers. I 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 and 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 it. 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. And that's actually a misconception.

And that's why if you look at a tin of Zinn or a tin of Lucy, the warning just says, this product contains nicotine. Nicotine is an addictive chemical. Whereas on tobacco product, it says this product causes cancer. And also, you can look at the California Prop 65, is that it, that lists cancer carcinogenic products. Yeah, they say everything causes cancer in California. Basically, but not these nicotine products, 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. The 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. 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 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. I 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 fire brand. 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, of a cynical play for for votes. And 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 pouch. The left coded. The left. I don't know who the Tucker Carlson of the left would be. we could get John 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 so much bigger than that. And 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.

there. So really appreciate you coming on odd lot. Yeah, that was so interesting. Yeah, thanks for having me on. First 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 China. Yeah, that consumes more resources and ends up like taking up more space in landfills. I see disposable vapes on the street all they. 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 to pull out of that conversation. One thing that I thought was really interesting was like just the different pathways, the sort of like pre-market tobacco pathways. I 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 like 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. Got to keep it on a shelf. Yeah. Yeah. Shelft stability. That's interesting. And then this application. And then there's this queue. Interesting that he mentioned COVID, sort of obviously and probably for good reason, taking resources away from some of the, 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.

I know. And how, like, maybe we need to find someone with a bodega and ask them, like, how do they get health bars in the first place? Yeah, that's a good question. We should just find any of them, we could just walk into some of them and ask them. they'll come on. I also think it's funny, the Helsingborg, Sweden has like the Shenzhen or the Taiwan, the Taiwan of nicotine pouches. 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, this is still true and up to date, but the only country to have banned cigarettes entirely? No. 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 Hamtell 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 totally a matter of time. But then you recognize that there's been a war against nicotine or tobacco for, you know, close to centuries. It's not going away. It'll just continue to evolve in different forms. They're never going to get rid of it. Okay.

Well, on that Lindy note, shall we leave it there? Let's leave it there. This has been another episode of the Oddlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wisenthel. You can follow me at the stalwart. Follow John Coogan. He's at John Coogan. Follow our producers, Carmen Rodriguez, at Carmen Armin, Dash O'Bennett at Dashobet at DashBot. Thank you to our producer, Moses Andam.

For more Odd Lots content, go to Bloomberg.com slash Oddlots, where we have transcripts, a blog, and a newsletter. And you can share about all of these topics. We don't have a nicotine room, but people will find a way to talk about it in the description. Discord.g.g. 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.

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