Yesterday the Wall Street Journal reported that the Biden administration is considering regulations targeting nicotine levels in cigarettes as well as menthol flavorings. With regards to nicotine, an addictive chemical present in tobacco smoke, the measure being considered is to only allow non-addictive levels of the substance in cigarettes. The potential measure with regards to menthol would be to ban it as a characterizing flavor in cigarettes, and possibly in other forms of tobacco as well. According to the report, the decisions regarding both initiatives have not been made yet.
However, given the uncertainty created by the possibility of regulatory intervention, the market showed an adverse reaction in tobacco stocks like Altria. Regular observers of the tobacco industry can hardly be surprised by this development. The FDA, then under the leadership of commissioner Scott Gottlieb already announced similar intentions several years ago. The regulatory overhang has probably contributed to a significant discount in tobacco stocks since then. Therefore, this news report did not really deliver much of a surprise, but it does raise some questions. Namely;
- how likely are scenarios that either one, or both of these measures will be implemented?
- how quickly will these policies be implemented if they are adopted?
- What will be the economic impact on the tobacco companies of both measures?
Likelihood of menthol and nicotine regulation
Perhaps it is to be expected that the new administration, with a significantly more progressive agenda than the previous one, would like to move decisively on tobacco control. Regarding the possible implementation of menthol and nicotine content regulation, it should be noted that these ideas constitute very different tobacco control measures. Menthol regulation on the one hand is a tested tobacco control measure that has already been adopted in the European Union and Canada, while nicotine content regulation seems to be a more radical and untested approach.
The rationale for menthol regulation is that it serves as a gateway for cigarette smoking by making the habit more palatable for new users, thereby fueling addiction and, by extension, long-term health damage. Removing mentholated cigarettes from the marketplace would presumably limit the uptake of smoking among youth, and might make it easier to quit for existing users. The fact that ethnic minorities are overrepresented as consumers of menthol cigarettes is an issue that has become more prominent over time, and has served as something of a rallying cause for minority advocacy groups in recent years.
Given that menthol is an additive in tobacco products instead of a naturally occuring substance, the practical implementation of a ban would be relatively straightforward. A significant advantage with regards to implementing a menthol ban is that lessons can be drawn from experiences in the EU and Canada, who have already implemented such rules. If evidence can be presented from other countries that a menthol ban leads to a lower smoking rate, this clearly helps in building a public health benefit claim.
Nicotine content regulation on the other hand is a largely untested control measure, as it has not been implemented on a significant scale in other markets. Additionally, nicotine occurs naturally in tobacco leaves and a content rule would be far more intrusive and would likely require far more extensive cooperation from manufacturers in order to be implemented successfully.
The rationale behind the possible introduction of non-addictive nicotine levels in cigarettes is that addiction to nicotine is the main reason why smokers continue to engage in behavior that causes severe long-term health problems in the majority of users. Taking the amount of nicotine in a cigarette down to non-addictive levels might raise the rate of success of smokers trying to quit, and might lower the risk of addiction in new users, or so the FDA thinks. The issue with this argument is that it is difficult to corroborate with data, because it is not at all clear how a lower level of nicotine would affect smokers’ behavior. For instance, it might lead smokers to smoke more cigarettes or inhale deeper, or it might lead them to different tobacco products, potentially even illicit ones. It would be hard to argue a public health benefit arising from such a rule if it may lead to more risky behavior in users.
Time-frame for implementation
The amount of time it might take for menthol and/or nicotine content regulation to be introduced in the marketplace is highly uncertain, and would depend to a significant extent on the regulatory path chosen to implement the new rules. I expect that the tobacco industry will try to challenge both a menthol and a nicotine content rule in court, something they did not do with regards to the recent tobacco-21 law.
Another unknown variable is the fact that the US senate has historically formed quite a formidable obstacle in the way of more restrictive tobacco laws. I presume that this is part of the reason why new tobacco restrictions in the US usually arise at the local level first. In the case of tobacco-21 measures, the adoption of federal legislation followed, rather than led, the implementation of more advanced age restrictions in many local jurisdictions. It is not entirely inconceivable that menthol regulation will follow a similar path, whereby a rising number of local jurisdictions where menthol sales are banned will at some point force the issue at the federal level.
In my opinion, both a menthol ban and a nicotine content rule would take several years at a minimum before they can be implemented in the marketplace. First, if new tobacco regulations are introduced as legislation, it is not at all a given that this bill would pass the US senate, where democrats currently possess only a razor-thin majority. Second, there is a significant chance that in case new rules are introduced by the FDA as part of its authority granted under existing legislation, these rules would likely be challenged in court.
Regarding the economic impact of a menthol ban and a nicotine content rule, I would argue that a nicotine content rule would likely be more damaging to the tobacco industry’s long-term economic prospects. Of course a menthol ban would cause disruption in the US market, but in my opinion this would largely be a transitory issue. The US is the largest market for menthol cigarettes by far, estimated to constitute as much as a third of all cigarettes sold annually, but the dynamics of a ban are nevertheless likely to play out along the lines of what we have seen in Canada and the EU.
As we have seen in these markets, once menthol products disappear from the marketplace the addicts remain and usually switch their consumption to non-menthol cigarettes or other nicotine products. Some users will probably use the ban to try and quit completely. But because users overwhelmingly switch to other nicotine products, the impact of a menthol ban on tobacco companies usually comes down to a manageable event. After all, these companies are usually the ones that sell the alternatives as well. The most significant impact will therefore be related to changes in market share between different manufacturers, as well as differences arising from disparate profit contributions per product.
A nicotine content rule would in my opinion be far more disruptive to the tobacco industry because it potentially takes away or minimizes the addictive characteristics of the tobacco product in question. A tobacco product devoid of nicotine would probably experience a lot of problems in maintaining its marketplace relevance, given that it would no longer deliver the dopaminergic effects of nicotine to the brain. The delivery of nicotine to neuro-receptors in the brain and the pleasure effect it induces is the main reason why people find smoking enjoyable. Taking away or impairing this mechanism would probably severely disrupt the tobacco market over a prolonged period of time, the effects of which would only be ameliorated to the extent that consumers are offered satisfactory alternatives.
Despite this observation, a low-nicotine rule is unlikely to be the Holy Grail of tobacco control as some might like to conclude. First of all, it would be far more difficult to introduce successfully than a menthol ban would be, not in the least because manufacturers would have to be forced to materially alter a product they have marketed legally for many decades. Additionally, a low nicotine product landscape would likely leave many users with a nicotine addiction with few options to satisfy their craving. This might form an ideal breeding ground for an illegal market to arise in force, which would be an absolutely undesirable outcome.
For this last reason alone, I do not believe a low nicotine rule would be an effective tobacco control measure. A menthol ban on the other hand, would likely only temporarily cause disruptions in the US market but might deliver real health benefits to the extent it contributes to a lower smoking rate in the US population. It constitutes a more targeted and more reasonable measure than a nicotine content rule, is backed up by substantially more empirical evidence from similar measures taken elsewhere, and is therefore a substantially more likely candidate for successful introduction in the US than a low nicotine rule would be.
Disclosure: the author owns shares of British American Tobacco
One thought on “Altria and BAT: Will The FDA Go Menthol?”
I think you should sell BAT (and any other tobacco stocks),
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