FDA Vaping Ban Could Blow A Hole In Tobacco and Cannabis Stocks

Topline: With public backlash coming to a head, increased regulation surrounding vaping in the U.S. will have a considerable impact on two sectors of the market: big tobacco and marijuana stocks.

Key background: Last Wednesday, the Trump administration said it would ban the sale of most flavored e-cigarettes. The announcement comes in the wake of mysterious vaping-related illnesses that have arisen throughout the country, causing hundreds of cases in dozens of states and possible links to six deaths. The White House and FDA had faced mounting public pressure to curb the epidemic, especially given the recent CDC data showing that youth vaping has reached an all-time high.

• Plans to reunite Big Tobacco in a $200 billion merger between Altria and Philip Morris International have now been thrown into some uncertainty as the industry faces its greatest regulatory threat since the 1990s.
• “While U.S. litigation risk was sufficient to break these companies apart back in 2008, U.S. regulatory risk is on the same plane, in our view,” Stifel analyst Chris Growe said in a recent note.
• Trying to offset decades of declining sales in traditional cigarettes, both companies have invested a good deal in e-cigarettes and cannabis (Altria paid $12.8 billion for a 35% stake in Juul last year, as well as $1.8 billion for a 45% stake in pot company Cronos, while Philip Morris invested more than $6 billion in a heated tobacco device called Iqos.) Since the FDA’s announcement, Altria and Philip Morris shares have fallen by 7.5% and 3.5%, respectively.
• Assuming e-cigarette flavors do become banned in the U.S., Altria will need the merger with Philip Morris to happen “so it can distribute Juul to the developed markets, all of which have varying rules and regulations,” CFRA Research analyst Garret Nelson told the New York Times.
• There is also “preliminary concern” among marijuana companies, with many worrying how the FDA’s proposed restrictions could “negatively impact cannabis-related regulations” in the U.S., according to a spokeswoman for the National Cannabis Industry Association.
• The chairman of Aurora Cannabis, one of the world’s largest cannabis producers, admitted on CNBC last Thursday that he is “very worried” about the vaping situation in the U.S.—Aurora’s stock has dropped almost 15% since the FDA’s announcement last week.