EUR 850.00 For Business Accounts Only

Morningstar | FDA Signals Anti-Initiation Strategy Will Be Sustained Under New Commissioner

The FDA announced tighter measures against what it describes as "epidemic" levels of youth consumption of e-cigarettes, a move we think signals the FDA will continue to pursue anti-initiation policies despite the resignation of commissioner Scott Gottlieb. We are reiterating our fair value estimates for the tobacco manufacturers as the measures, while significant in terms of signalling the FDA’s stance, will not have much direct impact on tobacco manufacturers’ cash flows.

The FDA’s proposals include a ban on flavoured cigars, moving forward the application deadline for flavoured e-cigarettes (except menthol, mint and tobacco) to August 2021, and new rules that would give the FDA the ability to eliminate products from the market it believes are being marketed to or sold to minors. These proposals will mostly affect Altria through its interest in Juul. They will also affect Imperial Brands and British American Tobacco, although with vaping products representing an immaterial amount of all companies' EBIT, any slowdown in sales growth is likely to have limited impact.

The FDA also plans to levy a user fee from e-cigarette manufacturers, much in the same way as it currently does to tobacco manufacturers. The proposal estimates the FDA would collect $100 million annually from such a levy. Although we have not modelled such an event into our tobacco valuations, we are not surprised at this proposal. In time, we expect the tax burden of e-cigarettes and heated tobacco units to be much heavier than normal goods, akin to current cigarette taxation. This measure, if imposed, will either shrink the price gap between e-cigarettes and more expensive tobacco products or squeeze the margins of the manufacturers if the cost is not passed through. We view the former scenario as more likely.