The FDA Drops an Anvil on the Tobacco Sector

Is this the beginning of the end for tobacco companies? Health groups, the Centers for Disease Control and Prevention, and the Food and Drug Administration certainly hope so.

Just two weeks after the CDC unveiled a graphic advertising campaign aimed at curbing smoking, the FDA on Friday dropped an anvil on the entire sector. Thanks to a law enacted in 2009, the FDA now has the authority to regulate certain aspects of tobacco marketing and manufacturing, although it cannot outright ban nicotine. Instead, it issued a preliminary guidance that it would require tobacco companies to report the quantities of 20 chemicals in its cigarettes known to cause cancer, lung disease, and other health problems. The FDA is planning to release this information to consumers in April 2013.

According to the FDA, 93 potentially harmful chemicals have been identified within cigarettes, but it is planning to focus on just 20, including levels of ammonia, carbon monoxide, and formaldehyde, in the coming year.

If it hadn't sunk in before, allow me to remind you yet again that the stringent laws of the United States are crippling to the tobacco industry. This doesn't mean that Philip Morris International (NYSE: PM  ) , which operates in more than 180 countries (with the United States not being one), or British American Tobacco (AMEX: BTI  ) are completely devoid of risk, either. In Australia, for example, both companies are fighting a ruling that would strip company logos from all packaging and replace them with graphic images of cancer-stricken victims.

But make no mistake about it -- this ruling by the FDA acts as yet another knock against domestic tobacco companies. Outside of Lorillard (NYSE: LO  ) , which has seen cigarette volumes for both its premier Newport brand and discount brands remain strong, shipping volume has been weak. Altria (NYSE: MO  ) shareholders have witnessed sales weakening for multiple quarters now and it -- along with Reynolds American (NYSE: RAI  ) -- announced layoffs over the next few years that will total 15% and 10% of their workforces, respectively.

The FDA wasn't done, however, and added one more jab into the tobacco sectors' eye on Friday. In a separate ruling, the FDA made it clear that any tobacco product that claims to be a reduced-risk or modified-risk tobacco product must first submit extensive testing data to the FDA so it can determine whether it is indeed a reduced-risk product. The only tobacco alternatives that currently exist are snus and dissolving tobacco, so it appears we are still a long way off from a reduced-risk tobacco product.

It definitely doesn't look like Big Tobacco will be catching a break from anyone anytime soon.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He strongly believes in donating to cancer research and encourages you to do the same. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Motley Fool newsletter services have recommended buying shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's never the butt of jokes.


Read/Post Comments (5) | Recommend This Article (12)

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  • Report this Comment On April 02, 2012, at 10:18 AM, Njja wrote:

    Once again we hear it's the end of big tobacco, what nonsense. While I agree people should understand the risks, once that has been done they should be allowed freedom of choice. If you are going to send soldiers off to war a man should be allowed to take a drink, or have a smoke, or eat a cheeseburger if he so chooses.

    All the Government cares about is MONEY, it can't live without the tax dollars tobacco generates, and all the FDA cares about is giving the Government yet another reason to raise taxes a little more.

    It's like Obama care, they tell us they need us all to pay because so many people use hospital emergency rooms for medical care. Have you done that? I certainly have not. However the 20 million illegal aliens do it on a daily basis. Are we going to deal with that? Sure, we will give them a pass since that might vote democratic if the Liberal's can sneak them in, and we will get the idiots (hard working Americans) to foot the bill.

    We need fewer "rules", smaller "government" and certainly less "taxes"

    Big Tobacco has done an excellent job for its shareholders especially in the era of 1% CD's.

  • Report this Comment On April 02, 2012, at 10:49 AM, thefamilyman wrote:

    It sounds like Big T is going to need Star Scientific's low TSNA tobacco after all...

  • Report this Comment On April 02, 2012, at 12:50 PM, SierraPilot wrote:

    The additives for tobacco used in cigarettes is early 1900’s and hasn’t changed ANY for the last 100 years. (except Expanded tobacco process). You would actually think the tobacco companies would mess with their formula? New formulas for new brands maybe. But not for Marlboro’s or Winston’s. The reason they want to keep it secret is so that copy cats cant’ determine the exact flavors/aromas they add. The exotic scents are less than .001% and do not affect nitrosamines. The biggies of flavors are what were available in 1900 and they are all natural; Sugar, cocoa, rum, licorice. They are mixed with the tobacco, roasted to a golden brown, dried, cut and then gently transferred to the manufacturing process. Some how people think tobacco companies have a big tank of nicotine and chemicals they inject into the process. NOT! Tobacco companies spend big bucks to make sure the product the consumer gets in 2012 tastes EXACTLY like it did in 1990 and 1950. So what you are going to get is a new label that says contains tobacco, sugar, cocoa, rum licorice and artificial flavors. What good is that going to do? Get a clue people

  • Report this Comment On April 02, 2012, at 1:15 PM, omni7 wrote:

    Sean,

    Your articles are always entertaining I must say. They remind me of the ones I read a dozen years ago when I first bought MO. Since your article of October 28, 2011 'Altria's Flameout', exactly what have been the results... On that day, MO traded at about $27.66 or so. Today, it is up to about $31.25 as of this writing. That is a change of about 12%, not bad. But I have been getting the dividend too, so that's a few extra percent. So far, so good. PM has been a winner for me too. Despite your articles against MO, they continue to perform as great companies do.

  • Report this Comment On April 03, 2012, at 8:02 PM, JimmyZangwow wrote:

    If govt decides to put graphic images of tobacco-related disease on packages, merchants (likely tobacco merchants) will start selling cigarette cases to put smokes into. People are going to get tobacco no matter what the executive and legal branches do.

    While these rulings aren't good for "big tobacco", they really are more of an annoyance than a real harm to their business. I mean, this federal govt-tobacco industry face-off has been going on since the late 1950s...

    For those who really like to smoke, the threat of cancer and a painful, costly death is nothing compared to nicotine RIGHT NOW and that is what drives it all.

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