We were pleased to hear both companies reporting that the FDA is “open to listening,” “not immune,” and “more straightforward” than it would appear. As such, we are increasingly optimistic that the ultimate outcome won’t be as deleterious to the category or as burdensome as we originally feared.

We expect to see a continued shift in consumption of e-cigs/vapor back to combustible cigs as e-cig choices become more limited — a net ‘win’ for big tobacco. This has continued to baffle us given the FDA’s public health priorities.

We expect further e-cig/vapor consolidation and, as a result, manufacturers’ pricing power and retail leverage to increase with MO and RAI best positioned given their scale and capabilities.

As Is, Deeming Regs Are A Clear ‘Win’ For Big Tobacco, Not Necessarily Public Health.

Our main concern remains that the final deeming e-cig regs will realistically stifle innovation, which could dramatically slow industry growth by dis-incentivizing consumer conversion from combustible cigs to e-cigs. This ultimately has a net negative impact on public health, which is
clearly in direct opposition to the FDA’s goal.

First off, we believe the sweep of the new regulation has been a real blow to the broader vapor industry, particularly smaller, less well-funded players, and innovation more broadly, given the costly and time consuming requirements and because innovation will likely be stifled. While perhaps not hugely evident yet, we believe many small industry players will be forced out of business as a result which has been foreshadowed by several announced leadership departures at many companies and industry/trade groups.

On the FDA front, MO likewise reports itself to be “well-prepared” to meet requirements under the new regulations. Both Nu Mark and Middleton (MO’s cigar business) are working on compliance and are actively engaging with FDA regulators and “other stakeholders” to advocate for changes to the regs.

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