Mitch Zeller did not step into an easy situation. About three years after the U.S. Food and Drug Administration (FDA) formed its Center for Tobacco Products (CTP), no action had been made on the pressing issues of menthol and deeming regulations for non-regulated tobacco products, such as cigars and electronic cigarettes, and not one of the thousands of substantial-equivalence applications had been ruled on. Many speculate that this is why previous CTP director Lawrence Deyton was ousted in favor of Zeller.
In the meantime, e-cigarettes became a hot-button issue. State and local governments rushed to ban, tax and restrict this “wild West” segment, lawmakers called for even more extreme measures (including applying the Master Settlement Agreement payments to e-cigs) and anti-tobacco advocates worked up a media frenzy over whether these new products were tricking minors into a lifetime of tobacco addiction.
The pressure was on Zeller, with barely a year on the job, to get these regulations out.
“Based on our contacts, I think Mitch Zeller was kind of forced to send out these regulations,” said Nik Modi, tobacco analyst for RBC Capital Markets, during a recent CSP Tobacco Update CyberConference.
And Zeller did, with the FDA finally announcing its proposed deeming regulations April 24. These regulations—the facts of which are broken down by NATO executive director Thomas Briant on p. 34—debuted to mixed reviews.
On one hand, many electronic-cigarette manufacturers were pleased that the regulations were less extreme than once feared.
“By resisting calls to regulate ahead of—and indeed in opposition to—the science and data, today the FDA has brought NJOY a giant step closer to achieving its corporate mission of ‘obsoleting’ cigarettes,” said Scottsdale, Ariz.-based NJOY president and CEO Craig Weiss. “They are encouraging signs that 10 years from now, this date will be remembered as the beginning of the end of the tobacco epidemic.”
On the other hand, with much ambiguity within the proposed regulations, many believe the announcement marks not the beginning of the end of traditional cigarettes, but merely the end of the beginning phase of the e-cigarette industry.
“I think about it as this is round one of a 12-round boxing match,” Modi says.
Retail Impact
Even in these early stages, the proposed e-cig regulations seem to be a win for brick-and-mortar retailers. The only aspect of the regulations that seems to have a direct effect on retailers is something most c-stores are already implementing: an 18-and-older age requirement.
“The blocking of sales to minors was a given,” says Steve Monaco, category manager director for Rockland, Mass.-based Tedeschi Food Shops. “We already had that provision in place."
“It was a measured response on making sure these other tobacco and nicotine products are not sold to minors,” agrees Mary Szarmach, vice president of trade marketing and government relations for Smoker Friendly, Boulder, Colo.
Equally important was what was not included: a flavor ban; an advertising ban, allowing e-cig companies to educate a still-growing consumer base; and no restrictions on where or how these products are merchandised, giving category managers the freedom to place the products on the front counter or backbar.
“Overall, I do not feel the FDA overreached,” Monaco says. “In fact, I expected a lot worse.”
The biggest downside for c-store retailers might be that the FDA didn’t go far enough and, at least in the initial proposal, will not ban online sales. “Since online sales of these products seemingly will continue to be allowed, these regulations are a net negative to c-stores,” says one tobacco manufacturer who spoke on the condition of anonymity. “Allowing online sales will specifically hurt c-stores the most.”
While Monaco had hoped the FDA might do away with online sales, thus boosting his business, he says the FDA’s proposal “will have no negative impact on our plan-o-gramming or category investment. I’m still very optimistic on category growth.”
Advantage: Big Tobacco
The deeming regulations will have more of an effect on e-cigarette manufacturers, though Modi believes the current regulations favor Big Tobacco, “particularly Lorillard, as the FDA did not mention rules on flavors and advertising.”
Specifically, larger, established tobacco companies have a clear advantage over smaller independent players when it comes to the new-product application process required under the FDA’s proposal. Once these regulations go into effect, e-cig companies will have two years to file a premarket tobacco application for every product they sell. This allegedly means a different application not just for every e-cig model, but also for every flavor or nicotine level.
“This application procedure is a complicated, expensive and time-consuming process,” says Briant of NATO. “The FDA estimates that it will take a manufacturer approximately 5,000 hours to complete one premarket tobacco application for a tobacco product, which includes conducting scientific studies on the new product and submitting all of the relevant paperwork.”
This will not be easy, or cheap, to do.
“We have concerns with the direction of some elements of the proposed regulations and their impact on small companies,” says Ronald Tully, vice president of new projects/public affairs for National Tobacco Co., Louisville, Ky.
“The FDA is definitely going to create barriers to entry in this category,” says Modi. “I’m expecting a big consolidation wave. Smaller manufacturers will have to merge; some will cease to be in operation.”
The fact that (after the two-year grace period to file these premarket applications) no new e-cig products would be allowed to market without new product or substantial-equivalence approval is a concern for big and small companies alike.
“Our main concern remains around e-cig and e-vapor innovation, which, if stifled, could dramatically slow down industry growth and conversion from combustible cigarettes, which would ultimately result in net negative public health impact,” Wells Fargo analyst Bonnie Herzog wrote in a research note. “Clearly, this would be in direct opposition of the agency’s goal.”
Big Questions
The 241-page proposed regulations document poses more questions than answers. There’s no flavor ban now, but the FDA will examine the public impact this action might have. The same goes for online sales, advertising and other pertinent issues.
“You have to walk before you run,” Zeller said during a media briefing. “Before we can restrict advertising or flavors, we have to have jurisdiction (via deeming regulations) over the segment.”
Zeller’s views are understandable, but Modi points out that there are some glaring gray areas within the proposed regulations. For example, the FDA does not clarify if manufacturers that make batteries not just for e-cigs but a number of consumer products will also have to go through the new-product approval process.
“I would have like to have seen a little bit more precision in some of language of the deeming regs,” Modi says.
Other pressing questions:
▶ How long will the commenting process take? In theory, 75 days. But, as Modi points out, the FDA had years to review data for these regulations: “I don’t think it’s fair you’re only giving the industry 75 days to come up with counterscience and counterintelligence.” The FDA has already extended the comment period for menthol; one imagines it will do the same for e-cigs.
▶ What about vaping? Despite the fact that vaporizers and e-liquids are the hot item in the e-vapor industry now, the FDA did not specifically reference these products in the proposed deeming regulations. Will the FDA come out with regulations specific to these products or lump them in with the rest? Perhaps more important, because some companies make nicotine-free e-liquids, can the FDA assert authority over this segment?
▶ How will the FDA handle product applications? With more than 200 e-cig companies on the market, the FDA is looking at hundreds of thousands of new applications. Though Zeller claims there is no longer a backlog of substantial-equivalence applications, can they be expected to be timely with this process?
▶Will Zeller see this through? Deyton lasted three years as CTP director. Zeller already has a year on the job, and it’s expected that it will take a minimum of two years before the deeming regulations actually make it to market. Will Zeller outlast his predecessor and see these regulations come to fruition?
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