How McKinsey Got Into the Business of Addiction

https://www.nytimes.com/2022/09/29/business/mckinsey-tobacco-juul-opioids.html

The consulting firm’s work with opioid makers is well known, but for decades McKinsey worked with Big Tobacco and has also advised Juul, the e-cigarette company.

Bogdanich and Forsythe, investigative reporters at The Times, are the authors of the forthcoming book “When McKinsey Comes to Town: The Hidden Influence of the World’s Most Powerful Consulting Firm,” from which this article is adapted.

When McKinsey & Company, the global consulting giant, sat down with executives of Juul Labs in late 2017, the vaping company was well on its way to becoming a sensation among teenagers eager to latch on to the latest fad — inhaling flavored, supercharged nicotine vapor through a sleek new device easily hidden from parents and teachers.

With grand ambitions, Juul needed marketing advice from McKinsey, the most respected voice in consulting, to help it on its way to a valuation greater than the Ford Motor Company. For less than two years of work, McKinsey billed Juul $15 million to $17 million.

But the client came with a reputational risk, and McKinsey preferred to keep the arrangement secret. Although its product was conceived as a way to help adults stop smoking, Juul stood accused of marketing nicotine to teenage nonsmokers, addicting a new generation in much the same way the cigarette industry hooked their parents. This month, several years after McKinsey took the company as a client, Juul agreed to pay $438.5 million to settle government investigations into its marketing practices, though it did not acknowledge wrongdoing in the settlement. Those marketing practices had included using young models, social media and flavored nicotine.

McKinsey, which was not involved in the settlement, said its work with Juul had focused on youth vaping prevention. That work was just the latest in a decades-long history of consulting for companies that sell addictive products. The full story of McKinsey’s role in advising these companies — while also consulting for their government regulators — has never been told.

Last year, McKinsey agreed to pay more than $600 million to settle state investigations into its role in helping Purdue Pharma and other drugmakers fuel the opioid epidemic. And for decades, McKinsey has helped manufacturers boost sales of the most lethal consumer product in American history — cigarettes.

As recently as 2016, more than 50 years after the surgeon general confirmed the link between smoking and cancer, McKinsey still saw merit — and profits — in continuing to help companies sell more cigarettes.

In a slide deck prepared for Altria, formerly Philip Morris, McKinsey offered ideas for how the tobacco company could keep customers and lure new smokers. It presented a mock-up of what a Marlboro smartphone app would look like, complete with a way for loyal smokers to win points redeemable for small prizes.

“We are one team, working side-by-side,” McKinsey wrote in a slide deck prepared for Altria, illustrated with photos of cigarettes. McKinsey also advised Altria on marketing e-cigarettes, with the goal of making one of its products the “Nespresso of e-vapor” and stopped advising tobacco companies only last year.

McKinsey’s services are highly valued; its clients include many of the most respected blue-chip companies as well as governments around the world. For companies selling addictive products it also offered deep ties to the Food and Drug Administration, a regulatory agency vital to their survival. In four years under President Donald J. Trump, McKinsey took in $77 million in consulting contracts with the F.D.A.

McKinsey’s vaunted value system points to why a company so widely admired could end up working so long for tobacco companies. On one hand, McKinsey used those values to recruit the best and brightest students by suggesting that a job there means more than a big paycheck — it also offers the possibility of doing good, of helping those most in need. Yet McKinsey’s overriding value, No. 1 on its list — to put client interests first — created an environment in which client service sometimes trumped its own moral code.

McKinsey denies any wrongdoing in helping to market opioids, vaping and cigarettes — its trifecta of addiction clients — or that its F.D.A. contracts posed a conflict of interest, because it never advised the agency on any specific drug, a McKinsey spokesman said in a written response.

Seth Green, a former McKinsey consultant who worked at the firm for two years and is now a dean at the University of Chicago, questioned the wisdom of rigidly adhering to the client-first dictum. “If we don’t bring a moral purpose to these businesses, then the purpose inevitably becomes the client and whatever the client is trying to achieve,” Mr. Green said.

Alfonso Pulido, a McKinsey partner, arrived at the San Francisco offices of the Covington & Burling law firm on a mid-October morning last year to do something antithetical to the firm’s strict code of secrecy: talk about McKinsey’s work with clients, specifically Juul and Altria.

Mr. Pulido was there to give a deposition in connection with an unresolved product liability case filed in a federal court in California. In the deposition, marked highly confidential, Mr. Pulido said McKinsey first discussed doing business with Juul in 2015 when it proposed doing a risk assessment of Juul’s tentative plan to enter the marijuana market.

McKinsey chose not to do the study, Mr. Pulido said, because marijuana “was not regulated or legal at the time.”

It wasn’t until 2017 that the consultancy performed a pricing study for Juul’s vaping device. Afterward, McKinsey offered advice on branding, organization, retail, flavor evaluation, youth vaping prevention and regulatory issues. The company also consulted for Altria, which was trying to muscle into the vaping business.

Flavored nicotine had become highly controversial because health care experts blamed Juul for using flavors that appealed to young people.

Mr. Pulido acknowledged that McKinsey had surveyed teenagers as young as 13, asking them to rank flavor names in order of preference, though he emphasized that no sensory testing had taken place.

Esfand Nafisi, a lawyer representing clients who had sued Juul for marketing to children, pressed him on that answer.

“Did anyone at McKinsey stop and say, ‘Hey, maybe we shouldn’t be helping tobacco companies study teenagers’?”

“The stated objectives were to help inform youth prevention activity as well as responsibly introduce a flavor that was appealing to adult smokers,” Mr. Pulido responded.

“In retrospect, does McKinsey think this survey was appropriate?” Mr. Nafisi asked several minutes later.

“I don’t have an opinion on it,” Mr. Pulido responded. But he added that it “feels correct.”

The survey found that the favorite flavor name among ages 13 to 21 was mint, Mr. Pulido said.

“Did you know that mint would go on to become an incredibly popular flavor with teens a year after this Power Point deck was presented?” Mr. Nafisi asked.

The work with Juul attracted interest at the highest levels inside the firm. Bob Sternfels, now McKinsey’s managing partner, played an administrative role on the Juul account, an internal document shows. (A McKinsey spokesman said that while Mr. Sternfels knew a senior Juul executive, he had not worked on that account.)

McKinsey’s most important work for Juul involved responding to the F.D.A.’s crackdown on youth vaping. With the F.D.A. circling, demanding answers as to why teenagers were so attracted to Juul, the company asked McKinsey to help prepare a defense and respond to the agency’s inquiry.

The nature of that work remains a secret, because for those services McKinsey was paid through Juul’s law firm, Sidley Austin, allowing Mr. Pulido to claim lawyer-client privilege. “I know in some instances we are retained through legal counsel as part of privilege,” Mr. Pulido said.

At least one McKinsey partner, Michael Chui, grew concerned watching vaping spike in popularity, though it was not at all clear that he knew McKinsey had Juul as a client. (Consulting teams are not allowed to share information.)

“In just a few years, vaping has wiped out two decades of work getting teens to quit (or never start) cigarette smoking,” Mr. Chui wrote in a public comment on a magazine article about Juul.

Mr. Pulido said McKinsey stopped work with Juul in 2019 because of “increasing regulatory uncertainty and increased awareness of youth use.”

Vaping became popular as smoking rates across the nation began to decline in response to a drumbeat of scientific findings that cigarettes are highly addictive and deadly, facts that the companies knew but kept secret, choosing deception over disclosure.

McKinsey began counseling the tobacco industry in 1956, when researchers had already reported data suggesting that smoking appeared to cause cancer. Back then, Philip Morris hired McKinsey to conduct a wall-to-wall examination of its manufacturing operation. This was no cursory walk-through. Consultants visited plants, interviewed managers and studied sales figures.

In a subsequent study, McKinsey recommended how the company should set up its research department. The report was significant for another reason: It foreshadowed the industry’s transformation from selling a largely agricultural product to a scientifically engineered cigarette with fine-tuned nicotine levels. It cited the development of “reconstituted tobacco,” a manufacturing process that in subsequent years was shown to help achieve nicotine levels that researchers considered sufficient to ensure addiction.

In 1964, Surgeon General Luther L. Terry settled questions over the dangers of smoking when he announced to the nation that studies had confirmed the link between cigarettes and cancer. Dr. Terry made his announcement on a weekend to minimize its impact on stock prices.

McKinsey now had another reason to back away from Big Tobacco. But the tobacco companies wanted to keep selling cigarettes, so McKinsey stayed to help them do just that. In addition to Philip Morris, the firm’s clients included R.J. Reynolds, Lorillard, Brown & Williamson, British American Tobacco and Japan Tobacco International.

In 1992, the federal judge H. Lee Sarokin became so outraged reading internal industry documents produced in a liability lawsuit that he cast aside judicial restraint when he wrote: “Who are these persons who knowingly and secretly decide to put the buying public at risk solely for the purpose of making profits and who believe that illness and death of consumers is an appropriate cost of their own prosperity!”

In response to mounting criticism, in 1993 Lorillard’s chief executive, Andrew Tisch, asked employees to cooperate with McKinsey, assuring them that the consultants were “renowned for their ability to solve problems and create opportunity.”

By taking on Lorillard, McKinsey agreed to help a company whose best-selling cigarette by far was Newport, with its high nicotine content and menthol flavor. Menthol masked the harsh taste of burning tobacco, making it appealing for novice smokers. Nicotine took care of the rest, turning them into repeat customers.

McKinsey did allow employees to opt out of helping Big Tobacco, or any other industry they found objectionable, but finding replacements eager to impress senior partners critical to their advancement was usually easy.

In 2006, a federal judge, Gladys Kessler, delivered the harshest condemnation yet of cigarette makers, branding them civil racketeers, saying the industry had “marketed and sold their lethal product with zeal, with deception, with a single-minded focus on their financial success, and without regard for the human tragedy or social costs that success extracted.”

Ten years later, McKinsey still felt comfortable proposing ways for the manufacturer of Marlboro cigarettes to sell more of them.

After Congress gave the F.D.A. the authority to regulate tobacco products in 2009, the agency sought McKinsey’s wisdom on a variety of issues, though its leaders apparently were unaware that the firm had been guiding Big Tobacco’s development for decades. In subsequent years, the agency awarded the consultancy $11 million for advice on tobacco regulation and for organizing the F.D.A. office that includes tobacco regulation.

“We have served the F.D.A. on over 30 initiatives,” McKinsey wrote in securing $1.1 million to advise the agency’s Center for Tobacco Products about, among other things, “risk identification and mitigation” as well as “influencing the behaviors, opinions and practices that are contrary to the goals and objectives” of tobacco regulators. Presumably that included cigarettes.

Eric N. Lindblom, former director of the Office of Policy for the Center of Tobacco Products, said he was “startled and surprised” to learn of these apparent conflicts. “We didn’t think, duh, they are also going to serve the industry,” he said.

Dr. Lawrence Deyton, a physician and the tobacco center’s first director, said he had also been unaware of McKinsey’s work for cigarette companies. “That should have been disclosed,” he said. As late as 2019, McKinsey’s roster of tobacco clients included not just Altria but also Imperial Brands, British American Tobacco and Japan Tobacco International.

From 2018 through early 2020, McKinsey made at least $45 million in fees from these four companies, including more than $30 million from Altria alone, according to McKinsey billing records. This summer, the F.D.A., after years of criticism for not doing enough to protect the public from nicotine addiction, issued two major directives: It ordered Juul off the market over questions of safety, and proposed reducing nicotine in cigarettes to levels where consumers might no longer buy them. Although the decision affecting Juul has been stayed, the actions showed how seriously the agency now views the health risks of both products.

McKinsey declined to answer certain questions about its tobacco work. In a written response, McKinsey said: “Like many other companies and industries, our approach to working on tobacco-related issues has changed significantly over the years. We have imposed ever-stricter limitations on our work in this space until last year, when we ceased tobacco-related work entirely. We ceased all work with the vaping industry in 2020.”

Left unanswered were a host of questions. Among them: How could McKinsey, with its booming health care practice, justify advising hospitals and government agencies on how to reduce health care costs and improve medical outcomes when for years its tobacco clients were filling hospital beds with the sick and dying at an enormous cost to society?

McKinsey also did not explain why it continued to advise cigarette companies long after it was well known and widely reported that their products are harmful and addictive.

With the book “When McKinsey Comes to Town” about to be published, Mr. Sternfels sent a note to veterans of the firm.

“We will not let the fear of criticism, or the possibility that we’ll make mistakes in the future, stop us from trying to help our clients take on tough challenges and make a positive difference through our work.”