U.S. Ban of Menthol Cigarettes

Nov 12, 2018

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Ban of Menthol

British American Tobacco Plc shares plunged to the lowest level in more than four years on news of a possible ban on menthol cigarettes in the U.S., which would eliminate products such as Newport that generate as much as one-quarter of the company’s profit.

A senior U.S. Food and Drug Administration official said last week that the agency is looking at restricting menthol in traditional cigarettes. Doing so would be a step toward eliminating or tightly limiting use of the popular cigarette flavor, something the FDA has been considering for some time. It would come in a separate action from the FDA’s planned restriction on e-cigarette flavors, according to the official. More aggressive regulation of nicotine has been a major priority for Commissioner Scott Gottlieb.

British American Tobacco shares fell as much as 11 percent in London, destroying 8.4 billion pounds ($10.8 billion) of market value. Shares of Altria Group Inc., which makes Marlboro cigarettes including menthol flavors, fell 4.6 percent in early New York trading.

“BAT is the most exposed name to the potential risk,” wrote Richard Taylor, an analyst at Morgan Stanley who estimates that U.S. menthol cigarettes account for 25 percent of total earnings.

The potential ban steps up the FDA’s campaign against youth smoking. Clove cigarettes were previously taken off the market, and now the agency is taking a tougher approach to alternatives, too. The FDA has been targeting flavored tobacco products as studies indicate that teens who smoke menthol cigarettes consumed close to twice as many weekly compared with non-menthol users.

Not all analysts think a ban is likely. Jefferies analyst Owen Bennett said such a move is improbable and would take years to implement.

Legal Challenge

Tobacco companies would probably mount a legal challenge that would delay the process, Gerry Gallagher, an analyst at Deutsche Bank, also said.

The decline in BAT shares illustrates that while the Lucky Strike maker is expanding into vapor and heated-tobacco products, its main business is still cigarettes. The company didn’t immediately respond to a request for comment.

Imperial Brands Plc declined as much as 5 percent. The Winston maker gets about 15 percent of earnings from menthol brands such as Kool and Salem in the U.S., according to Jefferies. The proportion is about 20 percent for Altria, according to the firm.

Imperial will continue to engage with the FDA about menthol cigarettes, but will not comment further until there’s a formal update from the agency, spokesman Simon Evans said by email.

Newport is BAT’s largest menthol brand and accounts for about 40 percent of U.S. sales, according to Duncan Fox, an analyst at Bloomberg Intelligence. Tobacco companies won an exception for menthol, the most popular flavored cigarette and the one preferred by black smokers, when a federal law banned other flavors in 2009.

BAT shares have dropped 40 percent this year, the biggest drop in at least two decades. They have had only two annual declines in the past 19 years.