On January 2, as reported by CNBC, the FDA banned most fruit- and mint-flavored nicotine products. The move aims to reduce teen usage of these products. On December 31, CNBC reported that a senior White House official had disclosed the Trump administration’s plans to ban flavored e-cigarettes. The official, on condition of anonymity, told CNBC that only menthol- and tobacco-flavored e-cigarettes and flavored liquid nicotine products would be spared from the ban.
According to its policy, the FDA will take action against companies that do not cease to manufacture, distribute, or sell unauthorized flavored e-cigarettes within 30 days of January 2. The FDA plans to prioritize enforcement against any flavored cartridge-based ENDS (electronic nicotine delivery system) products. That enforcement would exclude tobacco- or menthol-flavored products. The agency will also act against ENDS products where the manufacturer is targeting kids or has not taken “adequate measures” to prevent access to minors.
After May 12, 2020, the agency will also prioritize enforcement against companies that continue to sell ENDS products without submitting a premarket application. In August 2016, it became mandatory for all e-cigarettes and other ENDS products to secure premarket FDA authorization to be legally marketed. However, the agency had deferred enforcing these requirements until now.
According to CNBC, public health officials are raising concerns about this partial ban on e-cigarettes. They have highlighted the possibility of children switching to menthol flavors in the absence of fruity flavors. In December, Trump signed a bill to raise the legal age for purchasing tobacco products from 18 years to 21 years.
E-cigarettes have been implicated in deadly lung disease in the US
According to the CDC (Centers for Disease Control and Prevention), there were 2,561 hospitalized cases of EVALI (e-cigarette or vaping product use-associated lung injury) in the US as of December 27. The confirmed death toll had reached 55 on December 27, while more deaths were under investigation. The first case was reported in June 2019, and the number of reported cases peaked in September. That month, the Trump administration tried to ban all non-tobacco flavors of e-cigarettes, including mint and menthol. However, in November, Trump backed out due to intense lobbying from tobacco and vape manufacturers.
On January 2, as reported by CNBC, US secretary of health and human services Alex Azar claimed that the ban is targeting the US epidemic of teen e-cigarette usage. However, he reportedly supported the continued sale of tobacco- and menthol-flavored e-cigarettes, claiming that these were “less appealing” to kids. He also explained that the ban was not a consequence of the vaping crisis, which he called a “separate issue.” Azar highlighted the CDC’s finding that most EVALI patients had used THC-containing vaping products.
In an interview with CNBC, FDA Center for Tobacco Products director Mitch Zeller explained that the exemption of menthol-flavored e-cigarettes from the FDA ban is subject to revision. The agency will have to take this step in case children start switching from mint- to menthol-flavored e-cigarettes. In such a scenario, manufacturers would need to secure approval for menthol-flavored products through the PMTA (Premarket Tobacco Product Application) process.
How the flavored e-cigarette ban has affected Juul Labs
A study published on November 5 on the JAMA (Journal of the American Medical Association) Network highlighted the penetration of e-cigarettes in the US teen population. The cross-sectional survey had 19,018 participants. Of those, 27.5% of highschool students and 10.5% of middle-school students reported using e-cigarettes. Another study published on the JAMA Network on November 5 claimed that almost half of teens who had vaped had used Juul Labs e-cigarettes. The study also showed that Juul’s mint pods were the most preferred flavor by highschool kids.
In November 2018, Juul removed mango- and cucumber-flavored e-cigarettes from stores to help reduce teen use. In October 2019, the company announced the immediate suspension of sales of its fruit-flavored e-cigarettes in retail stores. Instead, the company started offering its mango, crème, cucumber, and fruit-flavored e-cigarettes on its age-restricted website. Then, the company announced plans to continue selling only mint, menthol, and tobacco flavors in retail outlets. In November 2019, the company also halted sales of its mint-flavored e-cigarette products. The company is now selling only three e-cigarette flavors: menthol, classic tobacco, and Virginia tobacco.
According to CNBC, the recent FDA ban on flavored e-cigarettes may have a limited impact on Juul, because it has already stopped selling fruit-flavored e-cigarettes. CNBC anticipates the ban having a heavier impact on NJOY, which has launched blueberry-flavored e-cigarettes in its stores.
On December 6, CNBC reported Juul’s appointment of new CFO Guy Cartwright as the company’s chief transformation officer. Juul expects Cartwright to save $1.0 billion in the near term as a part of the company’s restructuring efforts.
How these changes are affecting Altria stock
In December 2018, Altria (NYSE:MO) purchased a 35% stake in Juul for a consideration of $12.8 billion. Then, the company had valued Juul for $38.0 billion. In October 2019, Altra recorded a pretax charge of $4.5 billion as impairment of its Juul investment. The company cited Trump’s plans to ban flavored e-cigarettes and various city and state bans as major factors for the writedown. Therefore, Altria’s growth prospects depend heavily on those of Juul.
After the ban, Altria stock dropped by 1.32% to $49.25 on January 2. The stock closed at $49.57 on January 7, 0.52% lower than its previous close. Altria is trading 26.13% above its 52-week low of $39.30 and 14.36% below its 52-week high of $57.88.
Analysts’ views on Altria stock amid regulatory changes
Since October 2019, 15 analysts cover Altria on the NYSE, compared with 17 in December 2018 and 16 in July 2019. In December 2018, four analysts rated the stock a “strong buy.” Five analysts suggested “buy,” six suggested “hold,” one suggested “sell,” and one rated it a “strong sell.” In July 2019, it had one fewer “hold” rating.
In October 2019, four rated the stock a “strong buy,” three suggested “buy,” seven suggested “hold,” and one rated it a “strong sell.” The rating mix for Aphria has been similar in December and January. Four analysts rate the stock a “strong buy,” three suggest “buy,” and eight suggest “hold.”
Analysts’ average target price of $53.75 implies an upside of only 8.43%. Analysts first reduced their target price from $61.49 in December 2018 to $58.27 in July 2019. The target price then fell to $53.50 in October 2019 and $53.25 in December 2019.
Juul Labs continues to face legal challenges
On January 7, as reported by AP News, Arizona attorney general Mark Brnovich announced that he had sued Juul Labs for violating state consumer fraud laws. He also sued Eonsmok, a vaping company that has been aggressively marketing its products to the young population. Eonsmok has been trying to grab market share from Juul. New York, California, Minnesota, Washington, DC, and North Carolina have also sued Juul.
UK tobacco stocks rise after FDA ban
On January 3, Reuters reported that two UK-based tobacco company stocks had spiked after the FDA ban. British American Tobacco (BAT) and Imperial Brands (IMB) stocks rose by 2.5% and 1.4%, respectively. BAT even emerged as one of the highest gainers of the FTSE 100. This rise was notable considering the ongoing tensions in the Middle East. These companies had previously lowered their growth estimates for their US vaping businesses, assuming a complete ban on vaping products.
The regulatory clarity in the US vaping industry has brought relief to BAT and IMB management. Reuters reported that IMB spokesman Simon Evans highlighted the possibility of introducing fruit-flavored products in the US market. To do so, the company would need to secure approval through the PMTA process.
Reuters also reported that Jefferies believes that the FDA ban may affect vaping sales in the short term. However, the ban could emerge as a positive for BAT and IMB. Customers may switch to menthol- or tobacco-flavored e-cigarettes, or even to traditional tobacco products. Brokerages expressed optimism about the FDA decision’s effects on tobacco companies.