How Will The New FDA Ruling On E-Cigarettes Help Altria?

+25.98%
Upside
40.79
Market
51.39
Trefis
MO: Altria Group logo
MO
Altria Group

As a result of a dramatic rise in e-cigarette usage among youths between 2011 and 2015, the FDA passed a ruling to limit the e-cigarette industry. While the rule prohibiting the sale of e-cigarettes to minors has been well received, there are doubts whether the other regulations may inadvertently benefit the big tobacco companies.

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Small producers of vaping devices, which are battery operated devices that turn nicotine into inhalable vapor, may not be able to bear the costs associated with the approval process initiated by the FDA. However, larger companies, such as Altria (NYSE:MO), would be able to easily afford these expenses. These rules are stated to go into effect on August 8, 2016. While the e-cigarette companies have two years to submit their product applications to the FDA, they must wait a year after that for a review by the agency. This applies to all products which were introduced after 2007, which includes nearly all of them. Details on all ingredients and their production process have to be submitted, along with any health risks associated with the device and whether the product “presents less risk than other tobacco products.” Many companies have more than one vaping product that they sell; this would mean incurring costs which run into millions.

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Bonnie Herzog, managing director of Beverage, Tobacco, and Convenience Store Research for Wells Fargo, also recommended a buy on tobacco companies as a result of the FDA regulations. Even if small manufacturers are able to meet the requirements, they would be forced to pass the cost on to their customers. This increase in the price of the product would end up reducing the savings smokers receive by switching to e-cigarettes, which is one of the main reasons cited for switching. Not only will the FDA regulations kill off the smaller producers, it would also increase the barriers to entry. Many fear that it would also stifle innovation, which would not only be harmful to the companies, but also for public health. A study conducted by the Department of Health in the U.K. stated that reduction in the choice available for consumers may lead to the development of a black market with potentially harmful e-cigarette products. Such regulations also go against a report published by the U.K.’s Royal College of Physicians, wherein it was stated that the use of e-cigarettes should be promoted in the interest of public health.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Altria.
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