British American Tobacco PLC (LSE:BATS) will challenge the ban on its Vuse Alto vape pens from the US regulator in the courts and is “likely” to be granted a stay, according to analysts.
The US Food and Drug Administration (FDA) last night told the FTSE 100-listed tobacco company to halt sales of six of its flavoured Vuse Alto vape products, including menthol flavour, the most popular e-cigarette in the US and 3% of the group's revenues, following a jump in popularity of the product among underage users.
Shares in BAT fell 2.9% to 2,464.5p in early trade on Friday.
The company has said it will challenge the marketing denial orders (MDO) in the courts.
Analysts at Jefferies said the MDO were “largely expected” by the market, but it was important that the Vuse Alto tobacco flavour had not been included in the decision. Tobacco is critical and we expect approval of that.
Furthermore, the FDA says BAT may resubmit its application and the analysts expect the menthol products “never coming off the market”.
“Due to the fact the FDA has already denied numerous menthol vape applications to date, this was largely expected by the market,” the note from Jefferies said.
“For us, it is the tobacco decision that is critical, and for this, we still fully expect approval.”
BAT is expected to make total US vape sales of £1.1 billion in 2023, with menthol predicted to represent roughly £825 million, or about 25% of expected sales of ‘reduced risk’ products, or circa 3% of expected overall group sales, Jefferies said.
Analysts at Citigroup estimate Vuse Alto accounts for over 90% of BAT's US vapour business and that the menthol products which are subject the ruling represent 60% of these sales.
The FDA decision is therefore "clearly an unhelpful development for the stock and the group's reduced harm strategy in the US", but having spoken to the company (as Jefferies clearly also has done), the Citi team said they are "extremely confident in the evidence they have in order to challenge the FDA's process and overturn its decision in the Federal Courts".
As a result, they think the sharp sell-off of BAT overnight "may prove overdone" and while expecting the shares to open lower in London they expected "downside to be limited by the group's confidence in its fundamental data and position".
On the expected court challenge from the London-headquartered company, the Jefferies analysts said they were also confident it will be granted a stay.
“The reason we believe this is that all other big tobacco menthol denials to date that have been challenged, have also been successful in receiving a stay. We don't think this time will be any different.”
Courts have previously been critical of the FDA, the Jefferies team said, with judges pointing to the requirement for evidence of a menthol switching added benefit that was never requested when originally submitting applications, and also the fact the FDA never considered that youth using menthol could otherwise be smoking.
Furthermore, they added, the FDA is understood to have said it will expedite any applications for an age-verified Bluetooth-connected product that can prevent use from under-aged people, which would see a decision made within 12 months.
BAT is set to submit these by year-end.