Tobacco stocks plunged after a report said the U.S. government may only allow cigarettes with nicotine levels so low they’d no longer be addictive.
The U.S. Food and Drug Administration could also move to ban menthol cigarettes as the Biden administration considers imposing requirements to lower nicotine content, the Wall Street Journal reported, citing people familiar with the matter.
Marlboro producer Altria Group Inc. lost almost US$6 billion in market value Monday, while British American Tobacco Plc dropped as much as 7.3 per cent in London Tuesday. Analysts estimate the maker of Lucky Strike cigarettes gets as much as a third of its earnings from menthol brands such as Newport.
Imperial Brands Plc, whose brands include Kool and American Spirit, fell as much as 7.3 per cent. Stock of 22nd Century Group Inc., which already sells cigarettes with very low nicotine levels, jumped 11 per cent on Monday.
The FDA declined to comment on the report on Monday. The Wall Street Journal said the Biden administration is weighing whether to enact a menthol ban or nicotine restrictions, or both.
The industry has been anticipating an FDA decision about nicotine levels in cigarettes for years. The agency declared in 2018 that it intended to do so, prompting Altria to question whether that’s technically achievable and if that would effectively reduce smoking. Since then, 22nd Century Group, based in Williamsville, New York, has come out with reduced-nicotine cigarettes.
Philip Morris International Inc. slipped 0.2 per cent in pre-trading Tuesday after raising its outlook for the year amid stronger demand for its IQOS cigarette alternative. Philip Morris, which doesn’t sell cigarettes in the U.S., dropped only 1.3 per cent Monday, outperforming rivals on the prospect that tighter tobacco rules could spur demand for IQOS, which Altria sells in the U.S. through an alliance.
What Bloomberg Intelligence Says
The notion of a federal mandate to cut nicotine levels in U.S. cigarettes would impair Altria most, considering it controls 53 per cent of the US$90 billion domestic market, though we believe such a requirement would be years away and face fierce legal challenges.
-- Kenneth Shea, BI senior analyst
In an email, Altria said any FDA action “must be based on science and evidence and must consider the real-world consequences of such actions, including the growth of an illicit market and the impact on hundreds of thousands of jobs.”
The proposal on nicotine is serious, but politically would be difficult to pull off, according to Adam Spielman, an analyst at Citigroup. Some 15 per cent of voters smoke, and such a move could cost Democrats large numbers of blue-collar votes.
“We suspect that this idea will continue to be discussed for decades, but we would be extremely surprised if it were implemented in the next 10 or even 15 years,” he wrote in a note.
BAT’s Reynolds unit said there are better ways to improve public health and reduce the harm from tobacco.
“Many consumers wrongly believe that a cigarette very low in nicotine content is lower in risk than traditional cigarettes, a misconception that poses a major hurdle in determining proposed rulemaking for low nicotine cigarettes,” the company said.
One issue is that such a rule might lead some smokers to consume more cigarettes as they seek a fix to their nicotine cravings, inhaling more dangerous chemicals in the process. It could also create a black market for more powerful cigarettes.
The FDA has been expected to state its position on whether it would still allow menthol cigarettes by April 29, under a deadline imposed by a lawsuit. The case, brought by the African American Tobacco Control Leadership Council, had sued the government agency saying it had taken an unreasonably long time to respond to a citizen’s petition filed years ago that sought to prohibit menthol as a flavor in cigarettes.
--With assistance from Marthe Fourcade.