The FDA Drops an Anvil on the Tobacco Sector
Is this the beginning of the end for tobacco companies? Health groups, the Centers for Disease Control and Prevention, and the Food and Drug Administration certainly hope so.
Just two weeks after the CDC unveiled a graphic advertising campaign aimed at curbing smoking, the FDA on Friday dropped an anvil on the entire sector. Thanks to a law enacted in 2009, the FDA now has the authority to regulate certain aspects of tobacco marketing and manufacturing, although it cannot outright ban nicotine. Instead, it issued a preliminary guidance that it would require tobacco companies to report the quantities of 20 chemicals in its cigarettes known to cause cancer, lung disease, and other health problems. The FDA is planning to release this information to consumers in April 2013.
According to the FDA, 93 potentially harmful chemicals have been identified within cigarettes, but it is planning to focus on just 20, including levels of ammonia, carbon monoxide, and formaldehyde, in the coming year.
If it hadn't sunk in before, allow me to remind you yet again that the stringent laws of the United States are crippling to the tobacco industry. This doesn't mean that Philip Morris International (NYS: PM) , which operates in more than 180 countries (with the United States not being one), or British American Tobacco (ASE: BTI) are completely devoid of risk, either. In Australia, for example, both companies are fighting a ruling that would strip company logos from all packaging and replace them with graphic images of cancer-stricken victims.
But make no mistake about it -- this ruling by the FDA acts as yet another knock against domestic tobacco companies. Outside of Lorillard (NYS: LO) , which has seen cigarette volumes for both its premier Newport brand and discount brands remain strong, shipping volume has been weak. Altria (NYS: MO) shareholders have witnessed sales weakening for multiple quarters now and it -- along with Reynolds American (NYS: RAI) -- announced layoffs over the next few years that will total 15% and 10% of their workforces, respectively.
The FDA wasn't done, however, and added one more jab into the tobacco sectors' eye on Friday. In a separate ruling, the FDA made it clear that any tobacco product that claims to be a reduced-risk or modified-risk tobacco product must first submit extensive testing data to the FDA so it can determine whether it is indeed a reduced-risk product. The only tobacco alternatives that currently exist are snus and dissolving tobacco, so it appears we are still a long way off from a reduced-risk tobacco product.
It definitely doesn't look like Big Tobacco will be catching a break from anyone anytime soon.
Domestic legal issues can take a big bite out of shareholder returns, and if you'd rather avoid the headache altogether I suggest getting your copy of our latest special report: "3 American Companies Set to Dominate the World." Find out for free what three stocks our analysts feel could be your ticket to big gains overseas.
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He strongly believes in donating to cancer research and encourages you to do the same. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's never the butt of jokes.