What is the Food & Drug Administration smoking? The agency's recently released electronic cigarettes regulations reveal themselves to be a misguided attempt at protecting the public from the dangers of smoking, but they do little to achieve that goal.
Worse, by effectively destroying the nascent but growing e-cig and vapor industries, the FDA has all but assured it will protect big tobacco companies like Altria (NYSE:MO) and Reynolds American (NYSE:RAI) from competition. In other words, the rules are about what you'd expect government bureaucrats to contrive.
Enter the labyrinth
The so-called "deeming regulations" require manufacturers of any of the products they cover -- except those made before February 15, 2007, which are grandfathered in -- to submit to the agency, within two years, information demonstrating their safety. If they don't meet FDA standards, they won't be allowed to be advertised or sold. To get over that hurdle, though, manufacturers have to show that their e-cig products are safer than regular cigarettes and that they'll help smokers to quit.
While those conditions are likely insurmountable to begin with, no e-cig manufacturer will likely be able to meet the requirements, since the agency is largely convinced their products aren't any safer than cigarettes. In an interview with Vox, the FDA's tobacco czar dismisses the findings of public health groups in the U.K., like Public Health England and the Royal College of Physicians, that proclaim e-cig use is a far safer alternative to cigarettes, saying: "To me, it's a little too black and white to say with such certainty that this is a technology that's 95% safer than cigarettes. The reason is that you can't make an assessment of relative safety or risk of these technologies in the abstract."
But e-cig companies will also incur great costs in both time and expense in complying, if they're even able to do so. The FDA itself admits it could take as many as 5,000 hours to complete the necessary paperwork and cost "only" several hundred thousand dollars per product. Industry estimates, however, run orders of magnitude higher, between $3 million and $20 million per product. Plus applications have to be submitted for everything a manufacturer wants to do. New product design? Submit an application. Make a health claim? Submit an application. Register with the agency? Application. Introduce ingredients? Application.
It's obvious the only e-cig companies that will be able to afford such time-consuming and costly processes, even at the decidedly lowball figures offered by the FDA, are the established players in the industry: the tobacco giants that have their own e-cig and vapor products on the market. The many thousands of smaller players that currently populate the market will find those costs impossible to pay. Instead they'll be driven from the market by the ruinous costs. If they're lucky they may be bought up by Altria or Reynolds, which will further solidify Big Tobacco's dominance.
Arguably the most pernicious aspect of the new regulations is their impact on innovation. New developments and advances that could make e-cigarettes and vapor products even more useful in breaking the habit of smoking will never be made, because no company will attempt to undertake the expense and time involved. All the new regulations do is insulate the tobacco industry by killing off competition and ensuring no alternative to tobacco which is better, safer, or healthier makes it to market.
Expect Altria and Reynolds to thrive in the wake of the new regulations, as both have popular e-cig products on the market. For example, Altria noted in its earnings conference call last month that it continues to expand distribution of its MarkTen brand of vapor products, and it's working closely with Philip Morris International (NYSE:PM) on the global tobacco giant's iQOS new tobacco-heating e-cig product. Altria has exclusive distribution rights here in the U.S. and is hoping for FDA approval of a reduced-risk label by the end of the year.
Similarly, Reynolds American's Vuse brand has quickly catapulted to the forefront of the e-cig market. Reynolds noted in its own earnings call that Vuse was about three times the size of its nearest competitor, but also said the major upheaval vapor products caused in the tobacco world is now "long past." That could be partly because the major migration of smokers to vaping has already occurred, but also because uncertainty about what the FDA would do with e-cigs and vapor products played a role.
Although the regulatory agency has spun its deeming regulations as making strides in protecting public health, a truth-in-advertising standard would label them rules making the market safe for combustible cigarettes and Big Tobacco.
Rich Duprey has no position in any stocks mentioned. 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.