In a rare victory for the tobacco industry, a U.S. federal appeals court recently blocked a law administered by the Food and Drug Administration (FDA) as per which cigarette makers are required to place large graphic warning labels on their packs. [1]
The graphic labels, designed by the FDA, included pictures of dead and diseased smokers, and lungs damaged by heavy cigarette use. As per the ruling, cigarette companies like Altria (NYSE:MO) and Reynolds American Tobacco (NYSE:RAI) would no longer be required to place such images on their packs.
See our complete analysis of Altria here
The court rejected the FDA’s proposal on the basis that the organization had provided no data or evidence that such labels would reduce the number of smokers. The inability to do so violated the First Amendment, which “requires the government not only to state a substantial interest justifying a regulation on commercial speech, but also to show that its regulation directly advances that goal.”
However, the premise on which the court’s decision was made, that there is no evidence that graphic warning labels reduce the number of smokers, is highly debatable. There are a number of studies which have shown that a smoker would remember the health warning better if it was accompanied by a graphic image. [2]
Assuming that the graphic warning labels could in fact reduce the number of smokers, the court’s decision would be a big relief for cigarette makers in the country. The tobacco industry has been targeted by several governments worldwide and, in many countries, the only mode of cigarette brand advertising is through packaging. Furthermore, there is already a steady decline in the number of smokers in the U.S., considering the growing awareness of the harmful effects of smoking and the persistent price increases of cigarettes in response to heavy taxation.
We currently have a price estimate of $34 for Altria, which is in line with the market price.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Court Rules Out Graphic Cigarette Warnings, WSJ, August 2012 [↩]
- Graphic labels on cigarette packs “work better”, BBC News, June 2012 [↩]
