No Doom: Industry’s profits unlikely to suffe

Analysts on both sides of the regulatory fence said that tighter regulation of the tobacco industry is not likely to produce a doom-and-gloom future for the industry.

But in the long term, they agree that the new regulatory standards passed yesterday by the U.S. Senate likely will cement Philip Morris USA’s status at the top manufacturer, and that extra compliance costs will be passed on to smokers.

The FDA will have the power to regulate the content of tobacco products, including removing ingredients considered as hazardous; restrict the marketing and distribution of cigarettes and smokeless tobacco; focus on limiting the impact of advertising on youth; expand warning labels; and stop use of such characterizations as “light” or “low tar.”

“Given that today’s tobacco products are grandfathered into the legislation, and cigarettes online buy will continue to be sold in retail outlets, we do not expect any significant immediate effects on the sector,” said Christopher Collins, an associate director at Fitch Ratings.

“However, looking further ahead as more restrictive advertising limits are imposed on all tobacco products, the brands with large market share will maintain those shares.”

The nation’s largest tobacco manufacturer, Philip Morris, USA, supported the legislation. Its parent company, Altria Group, said in a statement that on balance, “the legislation is an important step forward to achieve the goal we share with others to provide federal regulation of tobacco products.”

R.J. Reynolds Tobacco Co. has had more than 10 years to consider the possibility that a bill like this would pass, spokeswoman Maura Payne said.

“Thus, we have spent considerable time analyzing how best we could comply with regulations like these, what we needed to do in our organization to prepare for compliance, and what we needed to do across all of our operating companies to ensure that all were successfully able to comply,” she said.

Payne said that the rule-making process and establishment of the details surrounding the bill will take some time.

“We will participate to the degree that we are able to in that process, but, at the end of the day, we intend to continue to successfully compete for the business of adults who choose to use tobacco,” she said.

Most experts said that FDA regulation likely would curtail innovation, particularly of smokeless products, because of increased restrictions on how they are marketed.

But Wesley Moultrie, the senior director at Fitch, said that FDA regulation could revitalize the U.S tobacco industry. “Should modified-risk products achieve acceptance and gain tobacco-product market share, sizable shifts in the tobacco industry are possible,” he said.

David Adelman, a managing director at Morgan Stanley, told The Wall Street Journal that the legislation won’t have a severe impact on profitability.

He said that the industry has learned how to cope with some restrictions since the Master Settlement Agreement of 1998 curbed tobacco advertising.

Having the FDA overseeing the industry sounds great in theory, said Dr. John Spangler, the director of the Tobacco Intervention program at Wake Forest University School of Medicine.

“In practice, I am not sure how much will be accomplished,” particularly if the initiative is not well funded, Spangler said.

“Having ingredients in cigarettes disclosed would be beneficial to the public’s health, and learning more about the components of tobacco smoke –which I think is in the legislation — may help us become more aware of the amounts and types of carcinogens and other poisons in tobacco.”

Charles Norton, the portfolio manager of the USA Mutuals Vice Fund, said that FDA oversight will not be “a game changer for the tobacco industry” in terms of profit and share price.

“Not by a long shot,” Norton said. “Like most of the manufacturers, we have been vocally opposed to this legislation because we believe that the FDA is stretched too thin already monitoring the nation’s food and drug supply. Adding tobacco-industry oversight to that charter seems like an accident waiting to happen.

“On top of that, it makes the launch of lower-risk products nearly impossible,” he said. “FDA oversight is adequately reflected in stock prices now, and does not alter our long-term view of the sector.”

Having the FDA regulate the industry is “probably the best place to house such jurisdiction,” said Scott Ballin, a tobacco-policy specialist who works with tobacco farmers, industry groups and public-health advocates. He drafted and initiated the petitions to the FDA for jurisdiction in 1988, and has worked on the issue for the last 20 years.

“What has been lacking in the debate is a civil and substantive discussion as to how this legislation will best serve the public health’s interest,” Ballin said.

“It is hard to imagine that can be achieved when the legislation being passed is not only out of step with technological advances, but that it is also the product of an agreement behind closed doors between the biggest tobacco company, Philip Morris USA, and the Campaign for Tobacco-Free Kids.”

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