FDA E-Cig Regulations Will Benefit Big Tobacco

Due to the complexity of the FDA's rules governing e-cigs, big tobacco will benefit.

Jun 17, 2014 at 7:00AM

E-cigs, widely considered to be the "next big thing" in the world of big tobacco with sales eventually outpacing those of traditional cigarettes, are running into trouble. With big tobacco companies like Altria (NYSE:MO), Reynolds American (NYSE:RAI), and Lorillard (NYSE:LO) falling over themselves to get in on the action, regulators have started to take notice.

Powerful enemies
E-cigs have gained several powerful enemies, one of which is the FDA. The FDA and e-cigs are long-term enemies; the agency tried to ban them back in 2009 as unapproved "drug-device combination products." This move was blocked by the courts .

However, in April of this year, the FDA took a different view on the devices and branded them as "tobacco products." Essentially, this means that e-cigs cannot be sold to anyone under 18 and must list their ingredients on the side, similar to the rules placed on traditional cigarettes.

This is potentially a problem. All tobacco products are controlled by the Family Smoking Prevention and Tobacco Control Act, a law passed in 2009 that gave the FDA authority over tobacco products. The problem is that the cut-off date for this stature was Feb. 15, 2007; any products brought to market after this date may only gain FDA approval by demonstrating that their products are "substantially equivalent" to existing devices.

Now, an e-cig company has to prove that its product is "substantially equivalent" to existing products. There are no rules or criteria for this definition, but substantial evidence is required in order to apply and seek approval from the FDA.

What's more, according to insiders, of the 3,000 or so substantial equivalence applications the FDA has received since 2009, only around 25 have been approved; that's a success rate of 0.83%.

More power, influence, and experience
This is where the big tobacco companies will benefit and their smaller peers will go under. After all, big tobacco has experience of dealing with regulators.

Companies like Altria and Reynolds have been fighting the courts and regulators for decades now. Their regulatory compliance teams have the capacity to meet the FDA's demands.

That said, the FDA has not yet decided on how it will treat e-cigs. While it has warned the industry that they could be treated like tobacco products, it could be years before the FDA's true intentions become clear.

Companies can continue to sell their products before the FDA's rules come into force, and it is likely that the e-cig industry will be given a grace period of two years or so after regulation is introduced. Still, this adds plenty of uncertainty going forward; tobacco-like regulations are something that the smaller producers may not be able to survive.

Foolish summary
As the FDA moves to regulate e-cigs, smaller producers could find themselves running into trouble. The FDA's demands mean that extensive studies and documentation will have to be put together to prove that e-cigs are "substantially equivalent" to existing devices, and this may be too much for smaller producers to handle.

For the big players such as Altria, Reynolds, and Lorillard, this additional regulation should be easy to overcome. The FDA's regulations are likely to make it easier for the big boys to take over the market.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Rupert Hargreaves owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information