Please ensure Javascript is enabled for purposes of website accessibility

Winners and Losers From FDA's New E-Cig Rules

By Rich Duprey - Nov 17, 2018 at 10:14AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Regulatory agency is going after e-cig flavors, though it's not banning them. Yet.

The Food & Drug Administration is imposing new rules to restrict the sale of electronic cigarette flavors at convenience stores and gas stations. The regulatory agency is cracking down on the popular smoking alternative devices because of skyrocketing teen use.

Under the new regulations, only tobacco, mint, and menthol flavors will be permitted at convenience stores, gas stations, and other locations where the general public can buy them. Fruit and dessert flavors will be relegated to adults-only stores, like vape shops.

Young woman with a vaping device

Image source: Getty Images.

A narrow target

As the industry continues to evolve, these new rules could play a major role in how competition unfolds. JUUL Labs has the most to lose. Its oversize thumb drive-like devices have captured 75% of the market, and because the new limits will affect only cartridge-style devices like the JUUL, this company will be hit hardest.

There are basically two different styles of electronic cigarettes, open and closed systems. Open systems are e-cigs, meaning you can refill the e-liquid used to deliver the flavor and nicotine; in closed systems, each prefilled cartridge is discarded after use and replaced with a new pod.

JUUL isn't the only company with cartridge style e-cigs -- most manufacturers offer both types -- but its industry preeminence makes it almost synonymous with the style. Because of JUUL's dominance, tobacco giants could benefit from the change in where e-cigs are sold.

However, the devices don't account for much in terms of revenue. Philip Morris International (PM -0.13%) generates the most, with about 13% of its revenues coming from reduced-risk products, while British American Tobacco (BTI 0.62%) realizes just 3.5% of total revenues from next-generation products, and Altria (MO 0.71%)'s innovative product portfolio contributes a negligible amount to its totals.

Altria announced that it will stop selling flavored e-cigs (other than tobacco, mint, and menthol flavors) in response to the FDA threatening to remove devices from store shelves if manufacturers do not come up with a plan to impede teen use.

Better than a ban

The problem with the FDA threats and device makers' responses is that adults also appreciate a variety of e-cig flavors because they make the transition from traditional to electronic cigarettes easier. Further, because the flavors help to mask the taste of the e-liquids, which users have said is a problem with making the switch, eliminating them could discourage more smokers from using them.

Still, the FDA banned the sale of flavored cigarettes, and it hasn't done that with e-cigs, at least not yet. A general consensus is growing, however, that although e-cig use is not safe, particularly for people who have never smoked, it is a better alternative for someone smoking traditional cigarettes. Making it more difficult to transition to e-cigs only results in more smoking.

A cynic might suggest that might be Altria's ulterior motive, since tobacco is still where it makes its money. However, the reason is more likely a willingness to be obsequious to the FDA ahead of its decision on the marketing application for its IQOS heated tobacco device.

It is expecting a decision by the end of the year, and the explosion of concern surrounding teen e-cig use is not helpful. Since the IQOS will be exclusively marketed in the U.S. under Altria's Marlboro brand, the tobacco company may not mind all that much if its MarkTen and Green Smoke brands end up falling by the wayside.

As successful as the IQOS is in Japan, currently the largest and most important market for the devices, the U.S. has the potential to be the biggest market for the IQOS overall.

Key takeaway

The e-cig industry could have faced a much worse fate than having its flavors segregated to adults-only stores, though some analysts say there is no proof adult stores do a better job with age verification than do convenience stores. With the flavors still available for purchase instead of being banned completely, adults seeking to switch to e-cigs can continue doing so while potentially inhibiting a teen's ability to purchase them.

As a result, JUUL could be the biggest loser while Big Tobacco can come out ahead.



Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$43.49 (0.71%) $0.30
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
PM
$102.58 (-0.13%) $0.13
British American Tobacco p.l.c. Stock Quote
British American Tobacco p.l.c.
BTI
$44.35 (0.62%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.