FDA Director Scott Gottlieb, in an interview with Jayne O Donnell of the United States for TODAY, announces new regulations on the way and place of sale of flavored vape juice.

Highlights of history

  • According to Morgan Stanley analysts, US tobacco companies could lose about $ 165 billion in profits if the FDA adopts a policy of "maximum nicotine".
  • The company downgraded British American Tobacco stocks to underweight, while maintaining an underweight position in Imperial Brands and Altria.
  • Analysts said the e-cigarette giant, Juul, would benefit as consumers move from smoking to vaping.

Profits of leading US tobacco companies could be halved if the Food and Drug Administration adopts a "nicotine maximum" rule in the next 15 years, according to analysts at Morgan Stanley.

The FDA should publish in October its proposal for a regulation regulating the amount of nicotine allowed in cigarettes and other tobacco products "so that they create the least dependency possible", according to the agency. The rule, if adopted, "would have significant benefits for public health" and "potentially significant economic benefits," the FDA said.

The regulation, if passed by 2035, would also cost the industry about $ 165 billion, Morgan Stanley analysts said in a research report released on Sunday.

"Reducing nicotine in cigarettes to a level of non-negligible or minimal dependence, in our opinion, could change the game for the US industry," analysts wrote.

Morgan Stanley was underweight the shares of Imperial Brands and Marlboro, the maker of Marlboro, which is an effective selling recommendation, and downgraded British American Tobacco to underweight.

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If this policy comes into effect by 2035, however, Morgan Stanley predicts that tobacco stocks will suffer, while the electronic cigarette giant, Juul, will benefit when consumers switch from tobacco to steam.

This is all the more bad news for the big tobacco companies, which have had to cope with a drop in sales in recent years due to new competition and changing consumer habits.

The proposed rule change would be bad news for investors as it would reduce the market value of Altria by 20%, British American Tobacco by 13% and Imperial Brands by 5% if the FDA applied it in 2035 .

These numbers are even more disturbing if the regulations are implemented a decade earlier. Altria's market capitalization is expected to decrease by 37%, while British American Tobacco and Imperial Brands will see their values ​​fall by 32% and 15%, respectively.

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Morgan Stanley predicts that the number of adult smokers in the United States will increase from 34 million, about 13.2% in 2018, to 14 million by 2030, or 5% to less than 1% of the adult population. 39, here 2050, even without the proposed nicotine. regulation.

The bank said it expects that a pack of cigarettes will cost about $ 16 to smokers by 2035.

If the FDA regulates nicotine levels in cigarettes, society thinks that smoking will drop to zero.

"We do not think that a smoker will continue to buy non-addictive cigarettes, especially in the presence of alternative nicotine delivery devices," analysts wrote.

Marlboro's maker, Altria, is most at risk if the FDA promulgates the policy of maximum nicotine consumption, analysts said. However, they added that the company was "best placed" to focus on alternative nicotine products because of its 35% stake in the Juul vaping company and its agreement with Phillip Morris for the sale of the product. PMI heated tobacco, iQOS, in the United States.

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Analysts have said that British American Tobacco "has a hard way to go in the US" because of its "underlay" of electronic cigarettes and heated tobacco products. According to Morgan Stanley, BAT holds only 10% of the electronic cigarette market, compared to 70% of Juul's market share. They also said that the company's heated tobacco product, Eclipse, was less successful than iQOS.

Morgan Stanley said it maintains an underweight rating of Imperial Brands shares as 23% of its profits are US cigarette sales and its brand portfolio is relatively small.

Tobacco inventories from mid-2017 to early 2019 have fallen by about 40% due to the surge in Juul's market share, potential menthol regulation and lower cigarette sales, according to Morgan Stanley.

Analysts said they did not believe the price of the stock fully reflected the risk associated with the proposal for maximum nicotine content, and that the threat that the policy poses would likely be a permanent headache.

© CNBCis a USA TODAY content partner offering news and financial commentary. Its content is produced independently of USA TODAY.

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