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Are tobacco stocks no longer bulletproof?
by James Phillipps on Oct 23, 2013 at 13:28
However, Ecita argued the cost of meeting stringent drug licensing criteria would run into ‘several millions of pounds’ for each producer and this would have to be passed on to the end consumer, pricing e-cigarettes out of many people’s reach.
Both Ecita and the likes of Ash have been pushing the health benefits of e-cigarettes heavily, with the latter pointing to the fact its research found 48% of users switched from normal cigarettes with a view to eventually quitting.
But not everyone is convinced. The World Health Organisation (WHO) said it has ‘not ruled them out’ as an effective way of mitigating the harmful effects of smoking but said it is still carrying out research in this area.
Elsewhere, a study in the medical journal The Lancet last month found e-cigarettes could be as effective as patches in helping people quit, but an earlier study by the University of Athens concluded that although less harmful than smoking, they still damage the lungs.
In the US, which previously had been ‘light touch’ on the issue, pressure is mounting for e-cigarettes to be regulated by the Federal Drug Agency after the Centers for Disease Control and Prevention (CDC) found e-cigarette use in US middle and high schools more than doubled year-on-year in 2012.
The release of its research last month prompted the National Association of Attorneys General to bring e-cigarettes under the Tobacco Control Act (TCA), which would restrict their advertising, but more significantly force producers to contribute to the Master Settle Agreement (MSA).
This is the fund into which tobacco companies pay around $6 billion a year to cover tobacco-related healthcare costs.
With Forbes estimating the e-cigarette market to be worth £1.7 billion a year and rising, political pressure is also likely to mount on bringing them under the TCA. Indeed, last month Fitch warned that declining MSA payments could potentially lead to bonds backed by it being downgraded.
Headwinds are clear
Regardless of which way the regulation of e-cigarettes goes, the headwinds facing the tobacco sector are clear and it is no surprise some investors are getting cold feet.
Fidelity’s Karunathilake said that as the threat of e-cigarettes is recognised, ‘tobacco companies will become viewed as lower quality franchises due to the emergence of a credible alternative product for the first time’.
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