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Vontobel Viewpoints: FDA New Direction on Tobacco - Our Take

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On July 28, 2017, the new Commissioner of the U.S. Food and Drug Administration (FDA), Scott Gottlieb, surprised the markets by launching a consultation paper calling for a new approach to tobacco regulation. Fundamentally, the idea is to separate nicotine, the addictive substance, from the burning of tobacco, which releases the smoke particles attributed to health damage. The goal is to establish a framework to regulate the consumption of nicotine that will cover delivery methods including both traditional cigarettes and the new reduced harm next generation products (NGPs) such as e-cigarettes and heat-not-burn (HNB) devices.

The FDA noted the potential for innovation to offer less harmful products and that they are proposing to regulate nicotine rather than attempt to ban it. An initial suggestion the paper made is to lower the nicotine within traditional cigarettes to minimally or non-addictive levels, however not necessarily for non-combustible NGPs. The paper also touched on the risk of flavors appealing to underage smokers – a potential warning aimed at flavors in vapor products as well as menthol cigarettes.

Our initial impression is this appears to be a sensible launch aimed at reducing damage to consumer health rather than an attack on any particular company or industry. We think action by the FDA focused on nicotine will help get past an ideological impasse in the U.S., which has pitted those who believe nicotine is fundamentally bad at any levels, against those who believe less impactful products have a place in the economy. This paper appears to side with the latter.

We realize the FDA action will be closely watched by many other regulators and has the potential to reshape demand across large parts of the global tobacco market. Our view is that offering consumers a step that would allow the continued choice of nicotine consumption, while also reducing health costs to society, is less likely to lead to long drawn-out legal battles with the tobacco companies – that could stall any change.

However, we are cautious. In regulatory terms, we are always wary of slippery slopes and there is the potential this could be the first of a multi-move plan by regulators. If a later step involved regulating nicotine limits (as it currently is in the EU) to very low limits, this would be a negative for companies selling into the market. In this document, the Commissioner of the FDA outlined his view that nicotine is not the cause of health damage; however, he left the door open calling nicotine “by no means a completely safe and benign compound.”

Also, enforcement will be a major consideration. According to the World Health Organization, there is not yet an established level of nicotine that leads to addiction. If a low maximum level was introduced to stop new consumers taking up smoking, but offered existing smokers amounts below current consumption patterns, one has to think through, how might consumers react – consume more cigarettes? create demand for black market supplies? switch to alternative methods of consumption? The FDA paper appears to support the last outcome. However, enforcement to hold back surging demand for illicit cigarettes can be a challenge as we have seen in markets as varied as Brazil, India and the UK. A surge in illicit cigarettes damages the sale of legally produced products and can lead to the consumption of unregulated lower quality products and falls in tax revenue. Euromonitor International estimates the black market for cigarettes globally accounts for some 460 billion cigarettes per year. The U.S. had a bad experience with prohibition of alcohol and policy makers are aware of this history. Also, there already are issues with Native American tribes selling untaxed cigarettes – as a route for illicit cigarettes already exists, regulators would be wary of encouraging this.

A market shift is already underway shifting consumption from tobacco to nicotine and we see this FDA push as reinforcing this. As a consequence, we believe >>Read More



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