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RAI’s Innovation Transformation, No Ban on Flavors from FDA

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Vapor innovation

Reynolds American’s (RAI) key to transformation is robust results and an active innovation pipeline. The company formed RAI Innovation Company to seek alternatives to traditional cigarettes.

With increasing health consciousness, vapor products have been the most important industry innovation. In 2015, over 60% of adult smokers have tried these alternatives. However, only 7% choose vapor products over traditional cigarettes exclusively.

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Innovative products versus peers

In January, national price increases of Reynolds American’s innovative vapor product VUSE increased its VUSE Solo units by 10% and its VUSE cartridges by more than 15%. Another significant innovation is Zonnic nicotine gum, which is carried in 33,000 convenience stores. From a ten-count package, Zonnic launched a 40-count gum package in two flavors and two strengths in April 2016, which helped its significant growth.

In addition, Reynolds also expanded distribution of its heat-not-burn products like REVO and CORE. However, the company continues to assess the long-term potential of these products and improve technology to increase acceptance.

British American Tobacco (BTI) and Vector Group (VGR) also produce innovative e-cigarettes to meet consumer expectations: Vype (BTI) and Zoom (VGR), respectively. Philip Morris International (PM) is exclusively licensed to commercialize Altria Group’s (MO) MarkTen e-vapor internationally.

Deeming regulation

On May 10, 2016, the FDA published Deeming regulations covering newly regulated products like electronic cigarettes or electronic nicotine delivery systems. The FDA banned the sale of these products to minors and prohibits providing free samples of these products.

No ban was put on flavors for vapor, realizing the benefits of transitioning away from traditional cigarettes and associated health risks. In addition, the FDA’s premarket authorization for products will be required through premarket tobacco product application, substantial equivalence, or exemption to substantial equivalence avenues.

Reynolds American (RAI) comprises 0.5% of the SPDR S&P 500 Growth ETF (SPYG). In the next part, we will explore why its stock price is trading higher.

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