U.S. Food and Drug Administration regulation could be a boon for Big Tobacco, according to economists, analysts and some public-health advocates.
The first federal effort to regulate a habit that has roughly one-eighth of all Americans puffing on cigarettes made in Richmond, and that generates tens of billions of dollars a year across the South, came with hope of attacking one of the nation’s top public-health problems.
But it might do that while helping major tobacco firms.
It could force out smaller firms, whose cheap discount cigarettes nibble into Big Tobacco’s profits, and create a shield from critics, since cigarette makers now will do what they do with the knowledge and more or less direct approval of federal health watchdogs.
“It will also provide greater legitimacy for the industry, which can only be helpful,” said Adam Spielman, a securities analyst with Citigroup Global Markets, in a recent report.
Henrico County-based Altria Group, which owns No. 1 cigarette-maker Philip Morris USA and No. 1 smokeless tobacco firm UST, sees a different impact.
“It should provide more predictability for all tobacco businesses,” spokesman William R. Phelps said.
“Innovation in developing reduced-risk tobacco products is going to be the key test,” Phelps said. “With clear guidelines and a clear oversight, there should be an opportunity for increased competition as new companies and existing ones work to develop products that could possibly reduce the harm from tobacco.”
Matt Myers, president of the Campaign for Tobacco Free Kids, said the oversight means Americans will know a lot more about what’s in cigarettes and smoke, and that tobacco companies will have to follow firm rules on how they make their products, how they sell their products, and what they say about them.
“Responsible companies won’t be incurring a lot more cost; those that aren’t, will,” he said. “It’s not a question of large or small.”
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There still are big questions about how the FDA will enforce the law, though.
It’s not clear how strictly the agency will use its powers to review new products — for instance, whether it will want to test and approve new products, such as the Marlboro Blend No. 54 menthol cigarette that Philip Morris USA launched this summer or the cigs4us.biz/lm-cigarette roll-your-own tobacco that the company is test-marketing, before they can be sold.
There’s a question of whether the FDA will cap nicotine content in cigarettes: The European Union’s cap of 1 mg per cigarette is only a bit lower than Philip Morris’s flagship Marlboro Red, but if the FDA moved to cut nicotine more deeply, the business impact could be hard to predict, Spielman said.
The impact on health, less so. Dr. Alan Blum of the University of Alabama’s Center for the Study of Tobacco and Society said smokers tend to compensate, whether by smoking more or inhaling more deeply when the nicotine dose goes down.
Also up in the air is what the FDA will do about menthol, a flavoring used in about 30 percent of cigarettes sold. Its scientific advisory panel is to make a recommendation in 18 months.
Tobacco firms will have a seat at the table when the scientific advisory committee considers what should or should not be in cigarettes and whether new products can be sold as being less risky.
“How can anyone defend having convicted racketeers involved in the public-health policymaking process,” said Stanton A. Glantz, a professor at the University of California at San Francisco medical school.
A panel of the U.S. Circuit Court of Appeals in Washington this spring upheld a 2006 decision that Big Tobacco had violated the federal Racketeer Influenced and Corrupt Organizations Act. Altria and other tobacco firms are appealing the decision.
In a recent paper, Glantz said the new FDA law gives the tobacco business protection from state efforts to set tough labeling, adulteration and misbranding rules, while ruling out the possibility of requiring prescriptions.
Another benefit for the tobacco business, he said, is that regulations must consider “technical achievability” of regulations as well as whether they could create markets for contraband tobacco products.
Spielman doesn’t think the FDA will take too hard a line on such regulatory questions as new products that essentially are the same as current ones, or on menthol, or on how many smoke constituents tobacco companies are required to test.
And its requirements that tobacco companies register their products and report on the ingredients they use are unlikely to be onerous for Big Tobacco.
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Small companies, though, are another matter.
“The No. 1 threat to industry profits comes via competition from the small discount players. But if these are to stay within the law, their costs will rise,” Spielman said.
“If the law is implemented the way we expect, its main impact will be to boost profitability by reducing competition from the small discount manufacturers.”
The filings, tests and paperwork of regulation could hit hard at small firms, many of which operate in only a few markets, economists said.
“They’re going to have to have lots more lawyers,” said James Brock, an economist at Miami University of Ohio.
It’s matter of economies of scale, said Richard E. Wagner, an economist at George Mason University.
“A significant part of regulation operates as a type of fixed cost,” he said. “To the extent regulation works this way in tobacco, the per-cigarette cost of regulation will fall as firms sell more cigarettes. . . . All firms are burdened, but some are burdened more heavily than others.”
Philip Morris has said it believes regulation will create more competition, in part by setting guidelines for new, reduced-risk products.
Brock, the economist, said FDA regulation could have a big impact clearing the way for products that substitute for cigarettes but are less dangerous.
Spielman, at Citigroup, said he doesn’t expect to see such products before at least five to 10 years. “We believe the rules will make it hard and expensive, though not completely impossible, to introduce genuinely new products, for example dissolvables and electric cigarettes,” he said.
Boosting the cost of launching products, he added, will reduce competition further.
“The concern everyone but Philip Morris had is this is a Philip Morris monopoly protection act,” Brock said.
“You have to ask if this will at least entrench Philip Morris’s 50 percent share or let it expand.”
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