An e-cigarette being smoked in one of the UK's more than 1,700 vaping shops
An e-cigarette being smoked in one of the UK's more than 1,700 vaping shops © Getty

For decades, tobacco groups have puffed along steadily, churning out their deadly product to smokers and delivering handsome dividends to shareholders. 

In recent years, however, they have been disrupted by new ways of getting a nicotine hit, such as ecigarettes. Some have embraced it, while others have been more cautious — but now US regulators have told all of them to sit up and take notice. 

The Food and Drug Administration fired a shot across the bows of the industry on Friday, signalling a potentially more permissive approach to those developing less harmful ways to take nicotine, while also warning Big Tobacco that it could be forced to strip its cigarettes of that same addictive substance.

“We must recognise the potential for innovation to lead to less harmful products” said Scott Gottlieb, FDA commissioner, in a lengthy speech on the future of tobacco control. “We need to envision a world where cigarettes lose their addictive potential.” Although he did not say nicotine was harmless, he added: “The bigger problem is the delivery mechanism — how the nicotine gets delivered.”

Following the FDA announcement, shares in British American Tobacco fell 7 per cent and Altria lost 10 per cent, wiping about $25bn from the combined market value of the two companies, which are the two biggest in the US.

Cutting nicotine levels could in theory lead to a sharp fall in smoking, as suggested by a study published in the New England Journal of Medicine in 2015. However, analysts say many questions remain. 

“What if people just smoked more to compensate for lower levels of nicotine?” said Vivien Azer, analyst at Cowen & Company. The tobacco companies, no strangers to legal battles, are likely to fight back with a “vigorous defence,” during the comment period, and perhaps even litigation, she said. “There are still a lot of unknowns . . . investor concern is not misplaced if the strictest reading of this announcement proves accurate.”

“Never underestimate the lobbying power of the mighty tobacco industry,” said Mike van Dulken from Accendo Markets, adding that “the fine print suggests balancing regulation of existing products with encouraging innovation for future, less harmful options”. 

The FDA is concerned because smoking is the “leading preventable cause” of death in the US, responsible for one in five of all deaths in the country, according to the Centers for Disease Control and Prevention. Smoking rates have fallen from 21 per cent of US adults in 2005 to 15 per cent in 2015, with higher than average levels among poor, disabled and less-educated Americans.

Deborah Arnott, chief executive of the UK antismoking charity Action on Smoking and Health, said it was “far too soon” from a public health perspective to force tobacco manufacturers to sell only low-nicotine cigarettes today, since it would merely encourage a big expansion of the illegal market in cigarettes. “But if it’s a warning to the industry that this is coming down the tracks, that’s a different matter, because that’s a very effective nudge to business that they’ve got to get out of the old market and into the new,” she said.

Such a shift could “significantly improve long-term profit growth and sector valuations”, said Owen Bennett, analyst at Jefferies. Tobacco companies trade at a discount to other consumer companies because of their “terminal growth rates”, he said, referring to the steady decline in the numbers of cigarettes sold as smokers quit. The FDA’s comments could help to remove some of the stigma around nicotine, and so could lead to the companies gaining non-smokers as customers, he said.

A man smokes a Philip Morris iQOS electronic cigarette in Japan
A man smokes a Philip Morris iQOS electronic cigarette in Japan © Bloomberg

The new generation of cigarette products come in two main varieties — ecigarettes which turn a nicotine-laced fluid into a vapour, and “heat not burn” devices that turn tobacco into a vapour, but do not burn it. 

The most outspoken of the tobacco companies has been Philip Morris International, which has talked about a “smoke-free future”, while its rival British American Tobacco has merely said that “consumers will decide” whether they want conventional cigarettes or the new alternatives.

On Friday, Altria and BAT both welcomed the FDA’s acknowledgment of a continuum of risk. “Success will require transformative, innovative products and changing the conversation about tobacco harm reduction,” said BAT, while Altria warned it would be “fully engaged throughout this process”.

The shift towards new products was particularly visible in PMI’s quarterly results earlier this month, which showed that its IQOS “heated tobacco” product had taken off in Japan. The number of conventional cigarettes PMI sold in Japan fell 25 per cent in a year, but the decline was more than offset by a rise in sales of tobacco for IQOS.

Globally, Mr Bennett said PMI was “best placed” in the long run to take advantage of the shift to vapour products while BAT was also in a good position. Imperial Brands was restricted by its lack of heated-tobacco products, while Altria was “in a tricky spot”. He said it would find it difficult to keep as large a market share in the new categories as it does in the old, as it licenses its heated-tobacco product from PMI. 

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