How New E-Cigarette Rules Will Hurt Small Shops

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Amid a storm of controversy, new U.S. Food and Drug Administration (FDA) regulations on e-cigarettes went into effect Monday. Ahead of the new rules, a flood of new vaping products hit the market, most from smaller companies.

U.S. tobacco giant Reynolds American Inc. (NYSE: RAI) did not introduce any new products for its top-selling Vuse brand, while Altria Inc. (NYSE: MO) launched some new flavors for its MarkTen brand of e-cigarettes. The market for e-cigarettes is forecast to reach more than $4 billion in 2016.

Health care providers are mixed in their response to the new regulations. Some argue that the health risks associated with e-cigarettes are unknown, possibly very harmful, and should require regulatory approval. Others argue that the use of e-cigarettes, which deliver a vapor to users rather than smoke, could prevent a great deal of the harm caused to public health from smoking cigarettes.

The new rules ban the sale of e-cigarettes to minors (under the age of 18) and requires companies to submit new e-cigarettes for government approval before marketing them. Devices already on the market may continue selling their products for three years while they seek and get approval. The new regulations were first announced in May 2016.

E-cigarettes are a small but growing part of both Reynolds’s and Altria’s businesses, and the new regulations will serve as an additional barrier to entry from smaller, less well-financed competitors.

The regulations almost certainly will kill the do-it-yourself market for e-cigarettes and the vape shops where the store owners make their own products. Those simply do not have the scale to compete with the likes of Reynolds and Altria.

And here’s why, according to Reason.com:

[T]he FDA wants information on how every possible combination of [e-cigarette elements] interacts with every possible e-liquid. Similarly, the FDA wants to know how every e-liquid interacts with every vaping system, and it expects applicants to compare the health risks posed by their products to those posed not only by cigarettes, which are indisputably much more dangerous, but by “similar products in the same category” and by “never using tobacco products.”

Comparative studies take a relatively long time and cost serious cash, both of which small operators have less than they would like.

Reynolds American’s shares traded up about 1% Monday morning, at $49.39 in a 52-week range of $35.69 to $54.48. The stock’s 12-month price target is $55.25.

Altria traded up about 0.1% to $66.58, in a 52-week range of $47.41 to $70.15. The consensus price target is $69.25.