Are Energy Drinks Still a Smoking Gun?

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Monster Beverage (NASDAQ: MNST  ) has chosen to market its flagship high-caffeine Monster Energy drinks as dietary supplements. That distinction, however, has left open the doors for  intense scrutiny from regulators, thanks in large part to the requirement that Monster inform the powers that be of reports that potentially link its products to deaths and injuries.

The controversy
One of the earlier reports -- which, incidentally, involved five people who consumed the energy drink shortly prior to their deaths -- caused the stock to drop more than 20% over just two days last October. Of course, Monster already had its hands full in the face of falling sales and fierce privately held competition in the form of Red Bull, and Living Essentials' 5-Hour Energy brand. Heck, even the up-and-coming at-home carbonation specialist SodaStream (NASDAQ: SODA  ) has its own line of energy drink flavors, and it delved even further into the category last month when it announced a partnership with eBoost.

In all fairness, however, in November it became apparent that Monster wasn't alone in the controversy when the Food and Drug Administration announced it was investigating more than a dozen adverse health reports associated with people who drank Rockstar Energy products. 

Even worse, the FDA confirmed reports of 13 deaths that may have involved consumption of the massively popular 5-Hour Energy supplements. Additionally, in January the Substance Abuse and Mental Health Services Administration noted that the number of annual hospital visits involving energy drinks more than doubled from 10,067 in 2007 to 20,783 in 2011.

Sidestepping the rules?
Now, with shares of Monster currently trading hands more than 42% below their 52-week high set last June, Monster has quietly decided to follow in Red Bull's footsteps and is set to stop categorizing its drinks as dietary supplements. Instead, the company will begin marketing them as "beverages." Of course, this also means it will no longer be obligated to tell regulators about adverse health reports potentially involving its products.

However, to Monster's credit, its stock did jump by as much as 14% on Nov. 27 after the FDA released a letter that clarified there were no conclusive problems with Monster Energy's two primary additives, taurine and guarana. Going even further, the letter states, "There is no certainty that a reported adverse event can be attributed to a particular product or ingredient."

In addition, Monster has stated that it still intends to voluntarily disclose such incidents to the FDA, and the company will for the first time begin including caffeine content for its products on the cans. Furthermore, while competitors like Rockstar have claimed they underwent the change in part because shoppers found the new labels easier to read, Monster company representatives have also cited two other primary reasons for switching categories.

First, they wanted to circumvent "misguided criticisms" that they were selling their drinks as dietary supplements because of the "widely-held belief that such products are more lightly regulated than beverages." The second reason, they claim, is that consumers will now be able to use their government food stamps (sigh) to buy the beverages. 

The multibillion-dollar question
Regardless of their motives, Monster reps also say their energy drinks can "equally satisfy the regulatory requirements" for either category. This, however, raises the question of whether the government should indeed be obligated to enact stricter regulation for energy drinks as a group.

Sure enough, public opposition continues to build; according to The New York Times just this week, a "group of 18 doctors, researchers and public health experts jointly urged the FDA on Tuesday to take action on energy drinks to protect adolescents and children from the possible risks of consuming high amounts of caffeine."

The FDA has previously stated that adults can consume up to 400 milligrams of caffeine each day, though many other experts believe the actual number is closer to 600 milligrams or more. By comparison, a 16-ounce latte from Starbucks contains around 150 milligrams of caffeine, or about the same amount as a 16-ounce Monster Beverage. Of course, much less is known about how much caffeine is safe for younger folks to consume, and we can be fairly sure most kids don't exactly have a hankering for their morning coffee each day.

So what do you think? Should energy drinks be subject to increased government regulation? Feel free to chime in with your vote in the poll below. 

More expert advice from The Motley Fool
The stakes are high for Monster Beverage these days. The stock had been nothing short of a rocket, but recent developments have sent shares spiraling downward. Health scares sparked a number of investigations at the state and federal level into the energy drink’s role in several fatalities. With the company’s value slashed in half, investors are wondering whether Monster Beverage is a value or a bust in the fast-growing energy drink category. Find out now in our brand-new premium research report, which details all the ins and outs you need to know about Monster Beverage. Click here now to claim your copy and start reading today.


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