Shares in tobacco companies plunged today on worries about the impact of US government proposals to cut nicotine in cigarettes to "non-addictive" levels.
Cigarette makers British American Tobacco plc (LON:BATS) and Imperial Brands plc (LON:IMB) fell to the bottom of the FTSE 100 as the US Food and Drug Administration announced tightened regulation on the industry designed to move smokers towards potentially less harmful e-cigarettes.
But in a note to investors today, JP Morgan said market concerns seem “misplaced” and thinks there is a high chance the FDA regulation will not be implemented.
FDA's plans for nicotine reduction in cigarettes 'might not' happen
JP Morgan cited six reasons why the proposed rules might not be implemented.
For one, the FDA’s plans could be challenged since reduced-nicotine cigarettes would still be ‘incredibly toxic’ and its findings need to be proven.
Another reason is that World Health Organization has said that no specific amount of nicotine has yet been identified as the absolute threshold for addiction.
JP Morgan said other possible hurdles to the proposal include political interference, the impact on taxes, technical difficulties in being able to produce non-addictive products and the possibility of illicit trade.
The bank also believes there is a buying opportunity in stocks that are on top of the market for alternatives to regular cigarettes, including novel nicotine products.
No financial impact of nicotine reduction until at least 2020, says JP Morgan
If the legislation is approved, JP Morgan does not see any financial impact before at least 2020. It estimates a 13% decline in volumes on the impact of nicotine reduction, offset by market share wins in novel nicotine and heat-not-burn products along with potential lower taxes on modified risk tobacco.
“Despite the initial anxiety, we do not see the FDA’s landmark decision as a frontal attack on the industry (only on combustibles) as we do not think the FDA will eventually ban nicotine across all tobacco products,” the bank said.
“On the contrary, the US is the first country to potentially adopt a “risk continuum” approach, accelerate the switch to Novel Nicotine Products and to encourage developing lower-risk offerings.”