Investors in Altria Group (NYSE:MO) don't have much to complain about the tobacco giant's long-term performance, which has defied fears about the industry's future for years. The company's solid gains have continued so far in 2016, but not everything has gone right for Altria. Indeed, one piece of bad news from the U.S. Food and Drug Administration in the form of a new rule dramatically increasing the agency's regulatory authority over Altria didn't come as a major shock to the company or its shareholders, but it could nevertheless present yet another obstacle that Altria will have to overcome in order to implement its strategic plans going forward.
Losing the battle over reduced-risk products
In May, the FDA finalized a rule that dramatically expanded its ability to regulate products that Altria and other tobacco giants make. To understand the rule, which took effect earlier this month, it's important to understand the background of tobacco regulation in the U.S. as it stood before the FDA's recent move.
Back in 2009, the Family Smoking Prevention and Tobacco Control Act gave the FDA broad discretion to regulate many different types of products that contain tobacco, including cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco products. That legislation gave the FDA oversight over the regulation of the manufacturing process for tobacco products, as well as their distribution and marketing.
However, the law didn't give the FDA authority over every product that Altria and its peers sold. Among the products available back in 2009 that were omitted by the law, the most obvious were cigars and pipe tobacco, which escaped regulation under the FDA's oversight.
Since then, Altria and other tobacco companies have made great strides toward promoting reduced-risk products. E-cigarettes, heat-not-burn technology, and various other dissolvable tobacco products have become much more popular, and many consumers see the new products as having advantages over traditional cigarettes in terms of potential health impact.
What the new FDA rule does
In response, the FDA sought to expand its authority over the industry by taking a broader definition of what constitutes tobacco products for purposes of regulation. The final rule effectively pulled in cigars and pipe tobacco, as well as e-cigarettes and other electronic nicotine-delivery systems, under the aegis of FDA regulation.
As a result, the FDA will have the ability to review products as Altria and other manufacturers develop them. The regulatory agency will be able to look at ingredients, product design, and health risks. It will also be able to evaluate whether products impermissibly cater to those younger than 18, which is of particular concern because of data showing that e-cigarette use among high school students has jumped precipitously in the past five years.
In what might come as a surprise to some consumer advocates, Altria has supported the extension of FDA authority over all tobacco products. In its own words, "Reasonable regulation can benefit adult tobacco product consumers, including by providing a framework to evaluate tobacco products that are potentially less harmful than conventional cigarettes."
What's clear, though, is that Altria has a much different viewpoint than the FDA when it comes to reduced-risk products. In comments that Altria subsidiary Nu Mark submitted in 2014, the company made clear that the FDA should apply the new law "based on science and evidence, recognizing differences between tobacco product categories, including noncombustible, tobacco-derived nicotine products." Nu Mark went on to give its case for why e-cigarettes have the potential to have fewer health effects than traditional cigarettes, and so the agency should be careful not to discourage innovation that could lead to health advantages over existing traditional tobacco products.
Altria's approach might seem pragmatic, given the widespread support for regulation of e-cigarettes and vaping products. Many believe that Altria will continue to work with lawmakers to try to pass legislation limiting the FDA's ability to impose restrictions on reduced-risk products going forward. Nevertheless, for those who had hoped that Altria might be more successful in preventing the new regulatory rule from ever going into effect, the FDA's latest actions make it clear that the tobacco giant will have to keep fighting hard in order to make sure that it can pursue its long-term plans toward fully integrating reduced-risk products into its lineup of consumer offerings going forward.