The U.S. Food and Drug Administration is eyeing up to $100 million a year in new user fees from e-cigarette companies in fiscal 2020 as part of the Trump administration's budget proposal released March 11, a move analysts said could have implications for makers.
If approved by Congress, the FDA user fee in the White House budget would be used for oversight of the growing e-cigarette industry and the agency's goals of reducing e-cigarette use by minors. It would change current law to make e-cigarette manufacturers and importers subject to FDA user fees that currently apply only to cigarettes, cigars, pipe tobacco, snuff, chewing tobacco and loose tobacco for hand-rolled cigarettes. The change would also boost the agency's annual fee cap to $812 million from $712 million.
"One of our most important public health efforts is to continue standing up a framework to make sure we can put e-cigarettes through an appropriate series of regulatory gates, and aggressively confront youth use of these products to make sure children don't become addicted to nicotine," FDA Commissioner Scott Gottlieb said in a March 11 statement on the new fees.
The proposal comes as the agency is preparing rules that would restrict the sale of most e-cigarette flavors to specialty vape shops or online. The rules aim to combat what regulators have said is a surge of minors using e-cigarettes and could be issued within the next month, Gottlieb said March 6.
A hit to tobacco profits
If passed, the user fee would cut into U.S. profits for e-cigarette manufacturers, including Juul Labs Inc., British American Tobacco PLC, Imperial Brands PLC and Japan Tobacco Inc., Jefferies equity analyst Owen Bennett said in a March 11 note to clients.
"User fees are normally determined by market share, which means Juul will bear the brunt of the additional charge, and therefore by proxy, so will Altria," Bennett said in reference to Marlboro-maker Altria Group Inc.'s 35% stake in Juul.
Juul sold $2.52 billion in products, or 70.5% of U.S. retail e-cigarette dollars, in the year ended Feb. 23, according to Nielsen data analyzed by Wells Fargo.
E-cigarette companies sold $3.57 billion in products at U.S. retailers for the year, according to the data from Wells Fargo.
Altria's minority stake in Juul also limits the cigarette-maker's share of profits from Juul sales, including those who switch from Altria cigarette brands, Bennett said.
"This means [Altria] has the most to lose from this new charge," Bennett said in the report.
Juul, Altria, British American Tobacco, Imperial Brands and Japan Tobacco did not return messages from S&P Global Market Intelligence on March 12 seeking comment.
Philip Morris International Inc., which does not sell any tobacco products in the U.S., is reviewing the budget proposal, spokesman Corey Henry said in a March 12 email.
The company is also waiting for the FDA to allow U.S. sales of IQOS, a device that heats tobacco plugs called HeetSticks without igniting them. Altria will sell the device in the U.S. and pay royalties to Philip Morris, in addition to any regulatory fees, Henry said.
"At the federal level, IQOS HeetSticks will be classified as cigarettes, as federal law defines a cigarette as a tobacco product wrapped in paper regardless of whether it is heated or burned," Henry said.
E-cigarette advocates blast proposal
In separate statements, two nonprofit advocacy groups advocating for the e-cigarette industry slammed the proposed fees as taxes on vaping.
"President Trump should fire whoever duped his office into proposing this $100 million tax increase on adult consumers trying to quit smoking," American Vaping Association President Gregory Conley said March 11.
During Gottlieb's two-year tenure, the FDA has failed to issue guidance for the vaping industry to comply with upcoming regulatory deadlines, Conley said. Under current FDA rules, companies with e-cigarettes on the market as of Aug. 8, 2016, can continue to sell those products but must apply for full agency review by August 2022.
"It is hard to believe the FDA's performance would have been better the past two years if they had an extra $100 million in their budget," Conley said in the statement.
Regulators should also strive to keep taxes on vaping lower than cigarette taxes to incentivize people to switch from smoking, Vapers United spokesperson Liz Mair said in an email.
Mair doubted that Congress would approve the budget proposal.
"Typically, these things end up being about as important in the legislative process as your average copy of People magazine," Mair said.