Big Tobacco Stocks Skyrocket After FDA Cigalike Crackdown

>

 

Last Wednesday, the US Food and Drug Administration moved to crack down on cigalike sales, ordering JUUL and four of its competitors–all of them Big Tobacco-backed brands–to rapidly assemble comprehensive plans to prevent underage vaping. If they fail to submit a convincing plan in 60 days, the companies could be banned from selling liquid pods in any flavor other than tobacco or menthol.

The market reaction? Tobacco stock prices sharply spiked, with British American Tobacco (whose RJ Reynolds subsidiary owns the Vuse vapor brand) shares experiencing their highest one-day bump in a decade. Altria, makers of the MarkTen Cigalike, saw a seven percent gain in value Wednesday, while Imperial Tobacco (blu e-cigs) rose more than five percent and Japan Tobacco (Logic) was up a more modest, but sustained 4.3 percent.

Tobacco stocks have since fallen some, but are still trading significantly higher than before the FDA announcement. Overall, tobacco stocks gained about $20 billion in value at their peak.

Why is this happening? After all, aren't these the very companies being targeted for allegedly marketing to children?

Bonnie Herzog is an analyst with Wells Fargo Securities who follows the tobacco and vapor industries. She says the key factor is that JUUL–which is independently owned with no ties to Big Tobacco–is the brand most likely to be hurt by the FDA's actions, presumably because it is the by far the most popular of all e-cig brands and enjoys the lion’s share of market share in the category. It’s also the only leading e-cig brand targeted by the FDA that isn’t a subsidiary of a tobacco company.

The logic is that Juul’s losses would translate into financial gains for two groups: other major cigalike competitors and traditional combustible cigarette companies, which are essentially one and the same.

'Given the market’s overarching concerns about Juul’s impact on cigarettes, especially Marlboro, we think a potential ‘ban’ on Juul would be positive,' Herzog wrote in a paper cited by the Virginian-Pilot. Profits from combustible cigarettes have been on the decline since 2015, the same year e-cig profits began to climb. In fact, e-cig profits are projected to bypass those of traditional cigarettes in 2021.

So, is the potential cigalike flavor ban actually a gift to Big Tobacco? We've already noted that nearly all adults who've switched from smoking to vaping prefer non-tobacco flavors, and some experts warn that smokers could be discouraged from quitting smoking and switching to vaping if they can’t get the flavors they want.

'Banning flavours would undermine the effectiveness of e-cigarettes in helping adult smokers quit,' Deborah Arnott told British news outlet The Sun. Arnott is the chief executive of Action on Smoking and Health, a Washington, DC-based advocacy group that has been fighting the tobacco industry since 1967.

'Only a tiny proportion of teens vape, smoking rates have continued to go down, and there's no evidence e-cigs are a gateway into smoking,' Arnott said, addressing the agency's description of teen vaping as an epidemic.

'The danger is that a flavor ban will benefit the tobacco industry, not public health, as it will discourage smokers from switching to vaping,' she said.

Juul, for its part, has in recent days beefed up the youth prevention statement on its website and has touted its $30 million investment in education campaigns and independent retailer checks as key accomplishments.

Juul also notes it's placing prominent nicotine warnings on its packaging, using 'unique ID match and age verification technology' to prevent minors from purchasing products directly from the company. It's also undertaken a more aggressive social media and marketing policy, shifting advertising away from featuring young adult models to using actual testimonials from users, who skew older. They are also working with social networks like Instagram and Facebook to remove user-posted content promoting underage vaping.

These actions were already ongoing when the FDA made its announcement. It remains to be seen what, if anything, else Juul can do to further convince the agency it's working to be a responsible partner in curtailing youth vaping. We'll be following this story closely, so check back soon for more coverage.