Don't dump all your tobacco stocks just yet, but the announcement by the Food and Drug Administration that it's moving forward on potential regulation of nicotine levels in cigarettes is not good news for the industry.
The regulatory agency said it was issuing an advance notice of proposed rulemaking on lowering nicotine levels to minimal or nonaddictive levels that will first seek public input on how low those levels should be. Because it's been estimated that it would take almost complete removal of nicotine to achieving such levels, the impact on the tobacco industry would be devastating.
The saving grace, if there is one, is that any actual regulation will take years to become reality, which is why you don't have to sell your tobacco stocks yet. Altria (NYSE:MO), the maker of the Marlboro brand of cigarettes -- which is bigger than the next nine brands combined -- has been preparing for the eventuality and says it intends "to participate in every step of this process."
Similarly, British American Tobacco's (NYSE:BTI) Reynolds American division says it's willing to work with the agency "on its science-based review of nicotine levels in cigarettes."
How low is low?
The FDA is barred from banning cigarettes. When it was given the power to regulate the industry under the Family Smoking Prevention and Tobacco Control Act, it was prevented from explicitly outlawing smoking or banning nicotine, but that doesn't mean it couldn't use other regulatory methods to achieve the same ends. It's clear to me that the latest effort is a step in that direction.
Last summer, the agency released a multiyear road map it said was intended to significantly reduce the number of deaths caused by smoking. Under one scenario the FDA laid out, it believes smoking rates could drop from the current 15% of the public to as low as 1.4%, resulting in over 8 million fewer tobacco-caused deaths through the end of the century.
One problem with the proposal is that it ignores the fact that cigarette smoking is already on the decline. The Centers for Disease Control says between 1965 and 2016, the number of adults who smoke has fallen from 42.4% of the U.S. population to just 15.5%. What that suggests is that if simply left to their own devices, smoking rates will drop to about 0% before 2050, well ahead of what the FDA is proposing.
The signature component of the plan is to reduce nicotine levels in cigarettes to "nonaddictive" levels, except that no one actually knows just how low that is.
The National Institutes of Health published a paper that said the typical cigarette contains between 10 to 15 milligrams of nicotine, and the average smoker ingests between 1 mg to 2 mg per cigarette. Because the addictive nature of nicotine is not uniform across all people, NIH estimates that as little as 0.5 mg of nicotine may be required to make cigarettes nonaddictive, perhaps even less, if the agency decides to include children in the study because they haven't built up a tolerance to nicotine yet.
First, do no harm
Even if such draconian measures don't ruin the tobacco industry, there could be unintended consequences from the effort. Beyond the likelihood that a black market would develop for cigarettes containing higher nicotine levels, smokers might actually smoke more to compensate for the lack of nicotine in their cigarettes.
For example, the Federal Trade Commission used to recommend smokers who wouldn't quit to switch to low-tar cigarettes, but the National Cancer Institute found that cigarettes that delivered less nicotine induced smokers to take larger puffs, more puffs per cigarette, and smoke more cigarettes per day. The FDA eventually stopped tobacco companies from marketing cigarettes as "light," "mild," or "low tar."
Still, there remains a glimmer of hope for tobacco companies, because through a carrot-and-stick approach, the FDA says it will continue to encourage the development of "less harmful products" like electronic cigarettes.
Philip Morris International (NYSE:PM), of course, has its iQOS heated tobacco device under review by the agency and it's attempting not only to get approved to market the device in the U.S., but to be granted a reduced-risk label, though an advisory committee has recommended against the latter. British American Tobacco says it is preparing to submit a marketing application to the FDA for review for its own heat-not-burn iFuse glo device.
Philip Morris has already said its future is smoke-free, and if the FDA goes through with drastic rules for nicotine, that may be what's in store for all tobacco companies.