S&P experts think FDA regulations threaten tobacco industry

According to a recently published S&P report, the groundbreaking Tobacco Control Act signed in June and providing the U.S. Food & Drug Administration with the authority to oversee tobacco industry would have significant impact on the industry as whole in the long-term perspective and result in huge risks.

The regulations allow the Agency to control production, naming, promotion and sales of all tobacco-containing products.
S&P’s senior analyst Charles Daniel said that although the latest regulations can change the competitive environment by halting the creation of new products and increasing the average expenses on doing business, the experts predict the new policies would not have an instant effect on the major tobacco companies.

However, the top three largest tobacco manufacturers - Altria Group Inc., owner of Philip Morris USA Inc.; Reynolds American Inc., proprietor of R.J. Reynolds Tobacco Co.; and Lorillard Inc., would be dramatically affected by the Act in the future.

Daniel said that the industry analysts agree in opinion the Lorillard may be hit the hardest by the FDA regulations, due to totally unclear situation with ban on flavored cigarettes and inclusion of menthol cigarettes into the list of banned products, taking into account that Lorillard is the overwhelming leader in the category of menthol cigarettes.

Another analyst at Standard &Poor rating services, Irina Demchyuk admitted that they rate tobacco industry using two major assumptions – cigarette sales volume and market share. And according to these assumptions, the current state of things the predictions for long-term perspectives are negative.

S&P as well recognizes the constant jeopardy also of subsequent sales declines that could result in downgrades in the next couple of years.

The analyst added that they consider the new policy could jeopardize the tobacco industry in the long-term prospects. The experts also share the opinion that the regulations could make it almost impossible to launch new products, and reduce consumer satisfaction by existing products due to the obligations to restrict the usage of many additives.
Moreover, in conformity with the Tobacco Control Act, the FDA will launch a Tobacco Advisory Committee that would assess issues concerning the usage of menthol in tobacco products. Though experts suggest that the Agency is not likely to ban menthol category completely, it could dramatically restrict the usage of this ingredient, what could have a significant negative impact on the industry, since menthol cigarettes account for one-third of all cigarette sales across the nation.

In addition, the report acknowledges that those companies who are willing to boost market presence through development of new products - including minor tobacconists that seek to introduce new brands – might face difficulties in implementing their strategies in conformity with the latest regulations. The Act also requires tobacco companies to stop marketing their smokeless tobacco products as healthier that ordinary tobacco products.

Experts also believe that increased expenses on development and introduction of new products could discourage many tobacco companies from innovating, obliging them to compete mainly on price. And last but not least, the regulations would make it harder for tobacconists to communicate with those smokers who are willing to try new products; therefore, the restrictions provide a hand of help to currently popular tobacco products and their manufacturers.

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