Let’s take a look at the FDA Tobacco Bill and see what effect it may have on the industry.
The bill would effect tobacco products manufactured and sold primarily by R.J. Reynolds Tobacco (RAI), Loews Corp.’s Lorillard Tobacco (LTR), Vector Group Ltd.’s Liggett Group (VGR), British American Tobacco (BAT) and Altria (MO) in the US.
The bill will enable the FDA to prevent the introduction of new cigarette brands.
“`(1) NEW TOBACCO PRODUCT DEFINED- For purposes of this section the term `new tobacco product’ means–
`(A) any tobacco product (including those products in test markets) that was not commercially marketed in the United States as of June 1, 2003; or
`(B) any modification (including a change in design, any component, any part, or any constituent, including a smoke constituent, or in the content, delivery or form of nicotine, or any other additive or ingredient) of a tobacco product where the modified product was commercially marketed in the United States after June 1, 2003.
`(2) PREMARKET APPROVAL REQUIRED-
`(A) NEW PRODUCTS- Approval under this section of an application for premarket approval for any new tobacco product is required.”
Now, what could cause a new product to be denied?
“(2) DENIAL OF APPROVAL- The Secretary shall deny approval of an application for a tobacco product if, upon the basis of the information submitted to the Secretary as part of the application and any other information before the Secretary with respect to such tobacco product, the Secretary finds that–
`(A) there is a lack of a showing that permitting such tobacco product to be marketed would be appropriate for the protection of the public health;”
In other words, do not expect a new cigarette to be introduced in the US. What is here now is what will be here 20 years from now. If you are Altria (MO), and have over 50% market share, this is very good news indeed. It also means that recently introduced low cost products may come under review and alterations to the product may become necessary that will substantially raise the cost of it. A shrinking cost basis for consumers between brands, will most likely cause many to “trade up” to the premium brand.
Currently, any litigation risk in cigarettes surrounds alleged fraud. Fraud in marketing and fraud in labeling. What will the FDA bill do? It completely removes the risk of litigation for fraud and allows the tobacco companies to tell consumers that they are complying with government product safety standards. By doing this they assure a safer product produced under the guidance of the FDA. Let’s look.
Since most of the current litigation is of the “Light” cigarettes, lets go to that section.
SEC. 911. MODIFIED RISK TOBACCO PRODUCTS.
`(a) In General- No person may introduce or deliver for introduction into interstate commerce any modified risk tobacco product unless approval of an application filed pursuant to subsection (d) is effective with respect to such product.
`(b) Definitions- In this section:
`(1) MODIFIED RISK TOBACCO PRODUCT- The term `modified risk tobacco product’ means any tobacco product that is sold or distributed for use to reduce harm or the risk of tobacco-related disease associated with commercially marketed tobacco products.
This means FDA approval of all claims on “light” and “low tar” cigarettes. This clause means that FDA approval of these cigarettes does give their stamp of approval that “light” is “safer”.
What are the conditions for approval?
Approval-
`(1) MODIFIED RISK PRODUCTS- Except as provided in paragraph (2), the Secretary shall approve an application for a modified risk tobacco product filed under this section only if the Secretary determines that the applicant has demonstrated that such product, as it is actually used by consumers, will–
`(A) significantly reduce harm and the risk of tobacco-related disease to individual tobacco users; and
`(B) benefit the health of the population as a whole taking into account both users of tobacco products and persons who do not currently use tobacco products.
They do not have to be “safe”, just “safer” than the current choice to legally be called “light”.
The bill also requires the FDA to inspect tobacco sellers for counterfeit cigarettes and report instances to the applicable Attorney General “immediately”. This has been a very large issue for domestic manufacturers as foreign “knockoffs” have entered the country and cost Altria millions of dollars in annual revenue. The bill effectively makes the FDA the “sheriff” and forces them to protect the market.
Could the FDA ban tobacco? The bill says no.
“`(3) POWER RESERVED TO CONGRESS- Because of the importance of a decision of the Secretary to issue a regulation establishing a tobacco product standard–
`(A) banning all cigarettes, all smokeless tobacco products, all little cigars, all cigars other than little cigars, all pipe tobacco, or all roll your own tobacco products; or
`(B) requiring the reduction of nicotine yields of a tobacco product to zero,
Congress expressly reserves to itself such power.”
Will Congress ban tobacco? Never…..How will the States ever replace the billions of dollars in tax revenue they receive from taxing them?
What the bill does is stop the FDA from banning tobacco and forces them to endorse it…..
Disclosure (“none” means no position):Long MO, None
Visit the ValuePlays Bookstore for Great Investing Books
This work is licensed under a Creative Commons Attribution 2.5 License.