If you think things have been tough for you in the past year, be thankful that you're not Altria (NYSE:MO). No more easy growth with the spin-off of its global Philip Morris International (NYSE:PM) business. State and federal taxes on cigarettes keep smoldering as the government continues to make smokers pay the price for their habit. Then Altria has to move south, relocating from its New York headquarters to Richmond, Virginia to save money.
So, when you're a tobacco company trying to catch your breath, what do you do next? Well, maybe it's time to support FDA regulation of your beloved cigarettes.
If you can't beat 'em ....
Yep, that's right. Altria is actively supporting FDA regulation of cigarettes. A bill has already been approved by the House and is currently being reviewed by the Senate.
But don't think this is going to be one big happy family yet. North Carolina Senators Richard Burr and Kay Hagan are trying to kill the bill, which happens to be supported by President Obama. Count Reynolds American (NYSE:RAI), parent of R. J. Reynolds Tobacco Company, among the bill-haters. Reynolds claims that the proposed legislation will stall product innovation and pile on more tasks to the FDA's already-heavy workload. Lorillard (NYSE:LO), maker of tobacco products including Newport and Kent, stipulates that, in its regulations, the FDA must not be "biased" against cigarette makers or provide competitive advantage to larger players.
There already are a lot of barriers to entry for smaller competitors, so the argument that this bill would choke the competition seems somewhat contrived. By the same token, Altria's attempt to play along with the FDA looks like a lot of smoke and mirrors. The FDA bill is called "The Family Smoking Prevention and Tobacco Control Act" – not easy stuff for the marketing department at Philip Morris USA to spin to its advantage.
Smoking is big business all around, with the government actually being one of the biggest beneficiaries. Even with increases in tobacco excise taxes, the level of total excise-tax collections had consistently fallen since 2003. The Alcohol and Tobacco Tax and Trade Bureau states that $7.9 billion in tobacco taxes were collected from the public in 2003, and $7.5 billion in 2007. But the government just raised the tax per box by almost 159%, from $0.39 to $1.01, leaving smokers to pick up the bill for the rest of us: the gross amount collected is estimated to be some $16.3 billion in 2009.
Considering how huge the industry is, it's amazing that the FDA hasn't stepped in before to manage new product approval and good manufacturing processes. Many attempts have been made, but then again...
FDA-approved smokes?
In efforts to protect Americans from physical harm, the FDA regulates everything from food and drugs to cosmetics and medical devices. Since the goal is to keep folks safe, it would be hard for the FDA to approve new products such as Marlboro Snus or whatever concepts tobacco makers are coming up with. Consider, though, that trans fats have been eliminated from products including Burger King (NYSE:BKC) fries, but you actually may be able to buy an FDA-approved cigarette in the near future.
As far as what FDA regulation would do to the industry as a whole, folks are still gauging how new FDA chief Dr. Margaret Hamburg will run the organization. Fellow Fool Brian Lawler has found that the leader of the FDA seems to have no real impact on the number of new drugs approved. However, the new FDA chief does have a reputation for being tough on the tobacco industry, as she advocated for bans on indoor smoking and subway cigarette advertising throughout New York City. Certainly that wouldn't bode well for the industry as a whole.
It will be interesting to see how companies with smaller exposure to the U.S. such as British American Tobacco (NYSE:BTI) and Vector Group (NYSE:VGR) would fare in this new world. The Vector Group is especially one to watch, with its Vector Tobacco group producing low-nicotine and nicotine-free cigarettes. Although others have said FDA regulation would strangle innovation, you have to think that these new types of products could thrive in this new climate.
The big picture for the tobacco industry, however, is somewhat bleak, which explains the widespread rejection of this bill by everyone but Altria. The combination of a recession, increased tobacco excise taxes, and FDA regulation could prove to be a cocktail delivering deadly results to fledging tobacco producers, leaving Altria to pick up the pieces and (gasp) grow in the otherwise declining tobacco sector.
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