Tobacco stocks smoked as US regulator sparks nicotine-reduction plan

Big tobacco stocks got smoked on Friday as US regulators said they planned to lower nicotine levels in an effort to lower the number of tobacco-related deaths, though analysts had mixed opinion over which companies were benefiting from the plans.

The US Food and Drugs Administration said it aimed to lower nicotine levels in cigarettes to non-addictive levels.

A new "comprehensive plan for tobacco and nicotine regulation" was launched that the FDA said will serve "as a multi-year roadmap to better protect kids and significantly reduce tobacco-related disease and death".

"The approach places nicotine, and the issue of addiction, at the center of the agency’s tobacco regulation efforts."

The FDA said it will consult on lowering nicotine levels in cigarettes "to non-addictive levels through achievable product standards".

FDA Commissioner Scott Gottlieb said: “Because nicotine lives at the core of both the problem and the solution to the question of addiction, addressing the addictive levels of nicotine in combustible cigarettes must be part of the FDA’s strategy for addressing the devastating, addiction crisis that is threatening American families.

“Our approach to nicotine must be accompanied by a firm foundation of rules and standards for newly-regulated products. To be successful all of these steps must be done in concert and not in isolation.”

With big tobacco companies representing 7.6% of the FTSE 100 index by weighting, the benchmark got burned badly right at the end of week, pushed from a slight dip to a fall of more than 1% for the day.

British American Tobacco was down as much as 12% and Imperial Brands down 9% just approaching 1600 BST on Friday, before rebounding slightly before the end of the session.

The news was enough to light up a sleepy Friday afternoon, said analyst Neil Wilson at ETX Capital. "It’s hard to overstate what this could mean for the companies affected: non-addictive levels of nicotine would likely mean a lot fewer smokers and of those people who do still light up, smoking a lot less," he said. "This will blow a hole in their earnings and forces a fundamental re-evaluation of earnings.

With shares in the BATS and Imperial cratering and then rebounding, Wilson said investors were trying to figure out what exactly this means for long-term valuations. "Even if it ultimately goes nowhere, it will leave investors extremely cautious. This is just the US regulator acting but we can easily see others, particularly in Europe, where regulatory pressures are already extremely high, following suit.”

The fall in share prices may be an over-reaction, however, said Mike van Dulken at Accendo Markets.

"Firstly, this is a plan to start a public dialogue focused on protecting children and reducing tobacco related disease and death," he said. "Secondly, the fine print suggests balancing regulation of existing products with encouraging innovation for future less harmful options.

"Thirdly, there may be exemptions and delayed implementation of existing rules that offers some relief. Fourthly, it may require input from other bodies. Lastly, never underestimate the lobbying power of the might tobacco industry."

The top line of the FDA's intentions might not sound great, but van Dulken said "it doesn’t read like the industry is destined to go up in smoke".

Philip Morris International fell but after less than two hours was already back in positive territory, though Altria was down 9%, with analysts at Wells Fargo saying the FDA announcement was positive for both companies, with both companies having been working on reduced-risk tobacco products for some time.

Stifel viewed it as negative news for the tobacco industry, and believe the announcement "represents a a paradigm shift in regulatory risk for US tobacco companies", while seeing Altria as best positioned for this regulation given its lower exposure to menthol and its iQOS reduced risk product, which is the sort of product the FDA seems keen to support going forward.

Philip Morris also benefit from having reduced its exposure to the US market.