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Synthetic Nicotine Regulation in US


KJP
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I have been looking into the synthetic nicotine provisions tucked into the omnibus spending bill the House passed last week.  It appears to be a nice win for big tobacco against new competition.

 

My understanding is that historically FDA regulatory authority extended to tobacco products and products containing nicotine derived from tobacco.  This created a potential loophole for upstarts to create and market free from FDA regulation (and potentially various forms of taxation) products containing entirely synthetic nicotine, i.e., nicotine created entirely in a lab, rather than chemically extracted from a tobacco leaf.

 

The budget bill closes this loophole by amending the Food Drug and Cosmetic Act's definition of "tobacco product" to include products containing nicotine derived from any source.  The bill is available at the following link and the provisions I refer to begin at page 1861:  https://vaporvoice.net/wp-content/uploads/sites/3/2022/03/pg-1870-syn-nic.pdf

 

Then, "[w]ith respect to a tobacco product that contains nicotine from any source other than tobacco," the bill requires the manufacturer to submit a marketing application within 60 days after the effective date of the act, and to withdraw the product if that application isn't granted within 120 days of the passage of the act.  As a practical matter, marketing applications appear to be very costly and time consuming undertakings [look at Turning Point Brands' earnings "adjustments" for context] that require significant scientific studies.  It's unclear whether the manufacturers of synthetic products have conducted the necessary (and quite expensive) studies, but it seems doubtful that they'd have applications ready in time and even more doubtful that the FDA would actually rule on the applications within 120 days.  For context, Swedish Match's PMTA for Zyn has been pending since 2020.

 

So, as far as I can see, the House bill is effectively a de facto ban on synthetic nicotine products.  Big tobacco, on the other hand, appears to be marketing products -- including nicotine pouches like Zyn, on!, and Velo -- that use tobacco-derived nicotine, so they would not be affected. 

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Posted (edited)

The bill has now passed in the Senate and will be signed by Biden:  https://tobaccoreporter.com/2022/03/11/synthetic-nicotine-rule-clears-senate/

 

I focused on nicotine pouches in my original post, but I believe this is a significant issue for many vaping products as well.  Take a look at the tweets coming out of the vaping industry trade group @VaporAmerican and its President @AmandaWheeler32

 

Also, I believe the FDA has some discretion with respect to its enforcement authority and may issue guidance saying it won't bring any enforcement actions against non-compliant products for a certain period of time, particularly in light of its inability to process marketing applications on anything close to the existing timelines.

Edited by KJP
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Posted (edited)

As far as I can tell, Zyn, on! and Velo are all tobacco-derived.  They filed PMTAs for Zyn back in 2020.  Those applications are still pending.

Edited by KJP
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  • 1 month later...

For a detailed explanation of the PMTA process and why it is impossible to comply with the deadlines in synthetic nicotine statute discussed above, see this letter to the FDA from the vaping lobby: 

 

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  • 3 weeks later...

Yes, $15bn is an absolute steal.  I am really unhappy about the price, the only saving grace is that I own PM as well.   There should be tremendous synergies, particularly in distribution in the US.  Fair price would probably be $25-30bn USD.  Hell, analysts expect SEK 5.50 in EPS in 2024, and that's before recent USD strength.  So 100 SEK offer is what, an 18 p/e pre synergies.

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17 minutes ago, Dinar said:

Yes, $15bn is an absolute steal.  I am really unhappy about the price, the only saving grace is that I own PM as well.   There should be tremendous synergies, particularly in distribution in the US.  Fair price would probably be $25-30bn USD.  Hell, analysts expect SEK 5.50 in EPS in 2024, and that's before recent USD strength.  So 100 SEK offer is what, an 18 p/e pre synergies.

 

I think it's a good deal for PM either way but what are the distribution synergies in the US?  I believe Altria has (at least for now) an exclusive US license to market IQOS in the US, so as long as that exclusive license is in place, I don't think they can get any distribution synergies via marketing IQOS and Zyn together.

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3 minutes ago, KJP said:

 

I think it's a good deal for PM either way but what are the distribution synergies in the US?  I believe Altria has (at least for now) an exclusive US license to market IQOS in the US, so as long as that exclusive license is in place, I don't think they can get any distribution synergies via marketing IQOS and Zyn together.

Altria mentioned it on the call at least once if I am not mistaken that PM claims that Altria failed to uphold its end of the bargain and there is a dispute whether or not IQOS and its later versions will be sold by Altria.  Also, you can also terminate Swedish Match salesforce and have Altria sell Zyn.

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Posted (edited)
6 minutes ago, Dinar said:

Altria mentioned it on the call at least once if I am not mistaken that PM claims that Altria failed to uphold its end of the bargain and there is a dispute whether or not IQOS and its later versions will be sold by Altria.  Also, you can also terminate Swedish Match salesforce and have Altria sell Zyn.

 

Yes, there is a dispute.  I suspect PM wants to get out of the IQOS license, and if they can then they could piggyback off Swedish Match's distribution system in the US.  Overall increased risk and negative for Altria, unless they can develop their own competing product. 

 

But I don't think PM wants Altria to distribute Zyn, because Zyn's biggest competitor is Altria's on!.

Edited by KJP
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23 minutes ago, KJP said:

 

Yes, there is a dispute.  I suspect PM wants to get out of the IQOS license, and if they can then they could piggyback off Swedish Match's distribution system in the US.  Overall increased risk and negative for Altria, unless they can develop their own competing product. 

 

But I don't think PM wants Altria to distribute Zyn, because Zyn's biggest competitor is Altria's on!.

 

+1 

 

The deal may be ok for SWMA shareholders if there is a significant PM stock component whose earnings near term are adversely impacted due to Ukraine-Russia war. 

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The $15B mentioned in the article is just referred to as a typical premium, they don't have any insight into the actual price discussed. That said, the SWMA owner list is more or less faceless so wouldn't be too surprised if they are able to steal it.

I don't agree with the PM stock being adversely impacted due to the war. PM and SWMA are valued similarly right now and have similar capital intensity but SWMA are growing about twice as fast, have a longer runway and better currency exposures.

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2 hours ago, HeadOfLeverage said:

The $15B mentioned in the article is just referred to as a typical premium, they don't have any insight into the actual price discussed. That said, the SWMA owner list is more or less faceless so wouldn't be too surprised if they are able to steal it.

I don't agree with the PM stock being adversely impacted due to the war. PM and SWMA are valued similarly right now and have similar capital intensity but SWMA are growing about twice as fast, have a longer runway and better currency exposures.

 

If SWMA management is super confident of future growth it makes no sense to sell now unless the premium offered is much better than the reported amount. Perhaps the competition is heating up with MO's On. 

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7 hours ago, KJP said:

 

Yes, there is a dispute.  I suspect PM wants to get out of the IQOS license, and if they can then they could piggyback off Swedish Match's distribution system in the US.  Overall increased risk and negative for Altria, unless they can develop their own competing product. 

 

But I don't think PM wants Altria to distribute Zyn, because Zyn's biggest competitor is Altria's on!.

Interesting thought that buying SWMA might be way for PM to get into the US market again.

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Posted (edited)

Swedish Match accepts PM buyout offer at 106 SEK/share:  https://www.wsj.com/articles/swedish-match-agrees-to-16-billion-takeover-by-philip-morris-11652252817

 

Is there a strategic buyer who could come in with a topping bid?

 

BAT:  No.  I believe a transaction would impossible for BAT, because SWMA and BAT are an oral nicotine duopoly in Scandinavia. 

Altria:  Given on! and Zyn's positions in the US nicotine pouch market, would this make sense and could it get by US antitrust regulators?

Japan Tobacco:  Don't know enough about them

Imperial Brands:  Don't know enough about them, but a quick look at the balance sheet suggests they likely the capacity to do it.

 

As for non-strategics, is a heavily regulated  industry like tobacco an area they want to get into?  The businesses have great cash flow characteristics, so they can handle debt.  And there are many who argue that nicotine pouches, in particular, ought to score very highly on ESG measures because they believed to be much, much healthier than cigarettes, so switching people over to them could save/improve many lives.

Edited by KJP
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I think JT is the best bet. They have some unsuccessful snus and nicotine pouch brands in Scandinavia but it's so small that they might be willing to give it up if the regulators don't like it.

If I remember correctly they have historically paid up when acquiring some of their international cigarette brands (covered in the Going down tobacco road book which I recommend). Japanese management in general is also not known for their captital allocation discipline, so if they like the strategic rationale I think they could talk themselves into it. The problem is that they aren't as big as PM, but with a stock + cash deal it could be possible.

 

The second best bet is probably non-strategics as you are mentioning.

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