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50% less profits predicted

19 Jun 2019. Profits for major US tobacco companies could be cut in half if the Food and Drug Administration (FDA) adopts a “maximum nicotine” rule within the next 15 years, according to analysts at Morgan Stanley, CNBC reported.

The FDA is set to publish in October its proposed rule regulating the amount of nicotine allowed in cigarettes and other tobacco products “so that they are minimally addictive,” according to the agency. The rule, if adopted, “would have significant public health benefits” and “potentially vast economic benefits,” the FDA said.

If the policy comes into force by 2035, Morgan Stanley predicts that tobacco stocks will be severely damaged, while the e-cigarette giant Juul will benefit as consumers move from smoking to vaping. This is all the more bad news for Big Tobacco, which has had to contend with declining sales in recent years in the face of new competition and changing consumer habits, the report said.

According to CNBC, the regulation, if adopted by 2035, would also cost the industry roughly USD 165 billion (EUR 147 billion) in lost profits, Morgan Stanley analysts wrote in a research report. “Reducing nicotine in cigarettes to non-addictive or minimally addictive levels, in our view, would be a potential game changer for the U.S. industry,” the analysts wrote. Morgan Stanley has rated the stock of Imperial Brands and Marlboro-maker Altria as underweight, which is effective a sell recommendation, and downgraded British American Tobacco to underweight. The proposed rule change would be bad news for investors, shaving an estimated 20 per cent off of Altria’s market value, 13 per cent off British American Tobacco and 5 per cent off Imperial Brands if implemented by the FDA in 2035, the report said.

Morgan Stanley predicts that the number of adult smokers in the US will drop from 34 million, about 13.2 per cent, in 2018 to 14 million by 2030, or 5 per cent, to less than 1 per cent of the adult population by 2050, even without the proposed nicotine regulation. The bank said that it expects a pack of cigarettes to cost about USD 16 (EUR 14.30) by 2035.