Subject: Tobacco - FDA Deeming E-Cigs Regulation - Quick Take - Not as Bad as Feared - Positive for Industry
Equity Research
FDA Deeming E-Cigs Regulation - Quick Take
E-Cigs' Proposed Deeming Regulations Finally Released - At First Glance, Not as Bad as Feared – Positive for Industry - The highly-anticipated advanced notice of proposed rulemaking of deeming regulations on "other" tobacco products including e-cigs are being published this morning after a review by the Office of Management and Budget (OMB). Although we have yet to review the full document, highlights include: (1) companies would have to apply for FDA product approval (but have 2 years after rules are finalized to do so, and can keep their products on the market in the interim and importantly continue to bring new products to market); (2) no free samples of e-cig products; (3) ban on the sale of the devices to anyone below age of 18; (4) no health claims in any advertising; (5) requiring manufacturers to register with the FDA and list the ingredients in their products (not clear yet if these ingredients will be required to be listed on products); (6) requiring a warning label stating that nicotine is addictive (which would have to be added no later than 2 years after the rule is finalized). Importantly the proposal did NOT include: (1) restrictions of flavors (although it has been suggested this could be re-evaluated at a later time); (2) a ban on internet sales to adults; (3) a ban on t.v. advertising. As a reminder, the FDA cannot enact a federal tax on e-vapor products or ban internet sales as these would fall under the realm of Congress. Further, the FDA cannot legally ban e-cigarette advertising as that is considered "commercial speech" which is protected by the First Amendment. Now that the proposed regs are published, there is a 75-day comment period, after which the FDA will review the comments, eventually issuing a final rule which must be reviewed by the OMB before being enacted. We believe the process could take as long as two years before final regulations are implemented given the rulemaking process though some items will need to be complied with immediately. Bottom line, our quick take on the proposed deeming regs is that they are broadly as expected and not as restrictive as some had feared. In general, they increase the barriers to entry for existing manufacturers which is positive. However, our main concern remains around e-cig/e-vapor innovation which, if stifled, could dramatically slow down industry growth and conversion from combustible cigs, which would ultimately result in net negative public health impact. Clearly, this would be in direct opposition of the agency's goal.
Regulatory Process Could Take Years - Now that the regulations are published, there will be a 75-day comment period. Then, the FDA must read the potentially hundreds of thousands of comments that it receives. After this, it will revise the final rule, which the OMB must review before the final rule is published. We note that lawsuits may extend the time frame even further. Bottom line - it will likely be years become fully effective.
We Continue to Believe the FDA Will Base its Decisions on Science - We acknowledge the daunting nature of the task the FDA faces in trying to regulate e-vapor. We believe the FDA understands the continuum of risk but does not yet have all the answers. The FDA remains committed to studying the long-term effects/impacts of e-vapor on public health as evidenced by its 14 tobacco research centers and ongoing research on toxicity and addiction.
Who Will Win the E-Cig War? – We believe the e-cig battleground will heat up in FY14 especially as the “Big 3” tobacco manufacturers push further into the category. Per our interactive model, we expect the “Big 3” to ultimately have a meaningful presence and to accelerate growth of the category due to: (1) their war chests of cash to invest, further boosted by billions of dollars from the non-participating manufacturer (NPM) credits and the elimination of the Federal Buyout Fee; (2) their entrenchment with retailers should ensure broad, scalable distribution; and (3) their expertise at building successful brands and their vast marketing databases of adult tobacco consumers. While the “Big 3” are a triple threat - treasure troves of cash, distribution power at retail, and superior brand building capabilities – we think there is plenty of room for other players that are currently entrenched in retail channels. We are impressed with the strong brand equity of some of these smaller players and businesses they have built and the role they played in creating an exciting new category.
Please call or email me with questions.
Thanks!
Bonnie
Bonnie Herzog
Managing Director
Beverage, Tobacco & Convenience Store Research
Wells Fargo Securities, LLC
375 Park Ave
New York, NY 10152
Phone: (212) 214-5051
bonnie.herzog@wellsfargo.com
