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Analysts say tobacco manufacturers will have years to adjust to menthol-free products

Analysts say tobacco manufacturers will have years to adjust to menthol-free products

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Menthol Cigarette Ban

The Food and Drug Administration has pledged again to try to ban menthol cigarettes, this time under pressure from African American groups to remove the mint flavor popular among Black smokers.

Tobacco manufacturers will have years to adapt to a menthol-free industry, if a menthol ban ever takes force, according to several analysts responding to the Food and Drug Administration’s plan to ban the flavoring in traditional cigarettes and cigars.

The FDA said Thursday that product standards are projected to be unveiled in 2022.

After that, a smooth rule-making process still requires the FDA to submit its proposal, receive comments, consider comments and prepare a final proposal, “which could be a multi-year process,” RBC Capital Markets analyst Nik Modi said.

That’s not counting expected multiple rounds of lawsuits, some of which could advance to the U.S. Supreme Court to resolve.

The FDA has said 30% of all adult smokers and more than 40% of all youth smokers consume a menthol style. About 85% of Black smokers prefer menthol flavoring, compared with 30% of white smokers, the agency said.

The FDA likely will face multiple lawsuits from tobacco manufacturers and anti-smoking groups considering that in 2009, Congress exempted menthol from banned flavorings in traditional cigarettes in the federal Tobacco Control Act.

Piper Sandler analyst Michael Lavery said “we consider the U.S. regulatory environment to be manageable. We expect any menthol ban, if one comes, to be years and years away.”

Goldman Sachs analyst Bonnie Herzog noted that the FDA also didn’t announce plans to dramatically reduce the nicotine levels in Thursday’s announcement.

“It is not surprising to us given less urgency around this issue, i.e., no court-imposed deadline, but we still think there’s a possibility that something could be announced in the coming weeks/months ahead ... as the critical premarket tobacco application process for e-vapor unfolds,” Herzog said.

“Both issues entail a complex and lengthy process that, based on precedent, will likely take several years to be successfully implemented, if at all.”

Modi said some of the issues facing the FDA include “unintended consequences having to be considered, such as will consumers self mentholate and does a ban encourage illicit trade?”

Modi noted Reynolds American Inc.’s revenue exposure is greater than rival Altria Group Inc. since Reynolds owns top-selling menthol traditional cigarette Newport, along with Camel menthol styles also being popular among smokers.

“We estimate 18%-20% of Marlboro sales are derived from menthol,” Modi said.

Modi said because nicotine is the addictive element in cigarettes, he projects smokers will just shift to traditional tobacco-flavored cigarettes rather than quit smoking.

FDA reasoning

“Banning menthol in cigarettes and banning all flavors in cigars will help save lives, particularly among those disproportionately affected by these deadly products,” acting FDA commissioner Dr. Janet Woodcock said in a statement.

“With these actions, the FDA will help significantly reduce youth initiation, increase the chances of smoking cessation among current smokers, and address health disparities experienced by communities of color, low-income populations and LGBTQ+ individuals, all of whom are far more likely to use these tobacco products.”

Analysts and industry experts anticipated the FDA clamping down on menthol flavorings as one dramatic regulatory shift from the Trump administration to the Biden administration.

In December, the Trump administration’s FDA and the U.S. Department of Health and Human Services did not list banning menthol cigarettes or reducing nicotine levels in traditional cigarettes among its 2021 priorities.

Woodcock said Thursday the FDA has “full support from the administration.”

Reynolds impact

A ban on menthol traditional and electronic cigarettes could deliver a major financial blow to the tobacco industry, in particular to British American Tobacco Plc, which owns Reynolds.

Newport also is the No. 2-selling traditional cigarette with about a 15% market share.

Reynolds has about 2,500 employees in Forsyth County, primarily at its 2-million-square-foot manufacturing plant in Tobaccoville.

Reynolds said in a statement Thursday that “the published science does not support regulating menthol cigarettes differently from non-menthol ... nor does it support that menthol cigarettes adversely affect initiation, dependence or cessation.”

“Reynolds will evaluate any proposed regulation and will participate in any consultation and the rulemaking process by submitting robust, science-based evidence.”

On Wednesday, retiring BAT chairman Richard Burrows told shareholders that “any such regulation (of menthol cigarettes) would be highly complex and could take many years to implement.”

“We support regulation that is clearly founded on scientific evidence and which considers all unintended consequences” that could include a potential expansion of the black market for menthol traditional cigarettes.

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@rcraverWSJ

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