Morgan Stanley: 'Critical Uncertainty' Over Pending Federal Regulations On Tobacco

Pending federal regulations on both menthol tobacco additives and so-called e-cigarettes could pose challenges to cigarette makers, an analyst said Thursday.

Morgan Stanley's David J. Adelman called expected rules from the Food and Drug Administration "two critical areas of uncertainty" for the industry.

Adelman expects rules to have "limited near-term impact" on e-cigarettes. But he thinks a gradual step-down of menthol additives -- to a point where they are no longer a characterizing flavor -- is a realistic possibility.

Lorillard LO dominates the market for menthol cigarettes, with brands including Kool, Salem and Newport.

But about 90 percent of U.S.-sold cigarettes contain menthol, even if they are not advertised as menthol cigarettes, according to the National Cancer Institute.

Reynolds American RAI agreed July 15 to buy Lorillard for $27.4 billion and sell the Kool and Salem brands and other assets for $7.1 billion to British-based Imperial Tobacco Group.

"Additional menthol regulation is likely but a complete ban is unlikely," Adelman said in a research note, adding that "it would be difficult for the tobacco industry to challenge potential regulations."

Regarding so-called e-cigarettes, the FDA is expected to issue rules next year requiring pre-market authorization for new products that "could stifle new e-cigarette introductions and innovations," Adelman said.

Wells Fargo recently estimated that e-cigarette sales in the U.S. will exceed the genuine item by 2020.

On Tuesday, the World Health Organization called the devices "a threat to public health" and recommended wide-ranging restrictions including bans on indoor use and all advertising.