November 1, 2018
THE COWEN INSIGHT
Earlier today, FDA Commissioner Gottlieb announced that the agency is “committed to announcing a new action plan by mid-November” specifically to address youth use of e-cigarettes. Herein, we offer updated analysis on the impact of raising the minimum purchase age to 21 (for combustible cigarettes), as well as thoughts on the potential regulatory timelines for incremental regulations.
Implications of Raising the Tobacco Purchase Age to 21
We have been publishing analysis on the potential impact to combustible cigarette industry volumes since 2015, after Hawaii became the first state to pass that regulation. Since then we have seen five additional states implement a 21 minimum purchase age for all tobacco (with 11 considering it currently). From an industry volume standpoint, we estimate that moving the minimum purchase age nationally to 21 would serve as an incremental 50 bps headwind to industry volume declines (under our base case scenario). As a reminder, the impact is muted because of the per capita consumption curve over a smoker’s lifetime (where younger smokers are generally lower per capita consumption consumers).
Regulating Flavor in the E-Cigarette Market
In his comments, Commissioner Gottlieb noted that flavored e-cigarettes show outsized appeal from under age consumers. Indeed, research published in Tobacco Control yesterday noted that 15-17 year olds were 16x more likely to be JUUL consumers than those aged 25-34, having surveyed over 13,000 consumers ages 15-34. While all of those sampled were not necessarily using flavored e-liquid, the study does capture why the agency is so focused on youth access. The tobacco companies have acknowledged this issue with some proposing to pull flavors until they are regulated (notably, MO’s announcement last week), while others have purportedly suggested applying “enhanced age verification processes” (we would expect JUUL to fall in this bucket).
Timing Around Regulatory Pathways
Raising the minimum purchase age to 21 would require legislation from Congress. Given that Congress is not in session, and will be lame duck between the mid-terms and January, we view it as unlikely that any legislation gets passed in 2018 (unless its attached to the Farm Bill, which we also view as unlikely).
For incremental regulation on e-cigarettes specifically, the FDA would need to execute against the following pathway: 1) introduce the proposed regulation, 2) open a public comment period (generally 90 days), 3) process the comments and write the regulation (generally 90 days), and 4) enter a cooling off period for Congressional review (generally 60 days). All told, assuming the proposed regulation were introduced on December 1, the earliest we could expect to see a new rule take effect (also assuming no legal action, which seems unlikely), would be 3Q19.