“The only thing that saves us from the bureaucracy is its inefficiency.” - Eugene McCarthy

Last week’s rumors became official headlines when tobacco giant Altria announced a definitive agreement to acquire e-vapor company NJOY. Reactions are mixed, with some investors firmly anchored to Altria’s value-destructive JUUL investment, while others consider Altria’s investment track record in its entirety. Instead of concentrating on the deal itself, I am giving today’s focus to a key detail that has received too little attention.

During Altria’s March 6th business update, which primarily covered the NJOY deal, brief mention was given to a report, Operational Evaluation of Certain Components of FDA’s Tobacco Program. The report’s unassuming cover image was also included on slide 9 of the supporting slide deck. But that report is not solely about the U.S. e-vapor category. Its pages, as well as the FDA Center for Tobacco Products’ response to that report, provide an intimate look at some of the finer points concerning the U.S. tobacco and nicotine space.

Let’s break it down.

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The Reagan-Udall Report

In September 2022, the Reagan-Udall Foundation for the Food and Drug Administration, an independent nonprofit created by congress, began an evaluation of the FDA’s Center for Tobacco Products’ operations. On December 19, 2022, a report containing its findings was submitted to the FDA Commissioner. This is the very document briefly cited by Altria.

The report acknowledges the difficult road traveled by the CTP since its formation in 2009. It also provides praise for various progress made. However, the report is also damning. Within its pages is a story of reactive operations mired in inefficiencies, dispelling any confusion as to why long-time FDA employees are jumping ship. Internal and external stakeholders claim a lack of clarity, transparency, and communication, begging the question of how the agency plans to fulfill many of its obligations (page 11). Additionally, it is said that the product application review process is impossibly demanding, with vague and changing requirements, along with inconsistent practices which lead to manufacturers’ inability to meet submission deadlines and stifles further product innovation (page 12). This confirms the brokenness of the impossible hurdle that is the Premarket Tobacco Product Application process, which I touched on last year:

The FDA estimates a single PMTA carries costs ranging between $117,486 and $466,563. This understates the total costs attached to research, development, and additional preparatory measures prior to submitting. The true total costs, as estimated by independent firms, are calculated to be in the millions. Additionally, a separate PMTA must be submitted for each individual SKU. That means substantial additional costs for each flavor, strength, and size of similar products. The total costs for small and independent producers aren’t just steep; they are an impossible hurdle to overcome.

To truly appreciate how backward things have been moving, all you need to ask is what ‘premarket’ means. A ‘pre’ ‘market’ process, by definition, would be one in which a product is evaluated before it goes to market. And yet, the FDA set extended PMTA deadlines for products already on the market and has continually deferred various enforcement efforts while it sorts through its backlog of applications, leaving a market in which most of the products are technically illegal. It’s all very postmarket.

The report goes on to explain that while the CTP has repeatedly acknowledged endless work to be done, no one really understands what the CTP is prioritizing or planning (page 13) and the organization appears overwhelmed (page 15). It sounds nearly unsalvageable, but fortunately, the report is not merely a scolding and spanking. It also correctly identifies pronounced inefficiencies and provides constructive language, emphasizing ways to improve regulations, guidance, application review, compliance, enforcement, and communication with the public and other stakeholders. Its conclusions speak of transparency, clarity, and sensibility, setting a stage for the FDA to act on.

The government responded 2 weeks ago.

The CTP’s Response to the Reagan-Udall Report

The CTP’s response to the Reagan-Udall report was authored by Brian King, Director of the FDA CTP. As I wrote last year, King has a unique history:

Brian King, who has over twelve years of experience working at the CDC, has been selected to become the new director of The Center for Tobacco Products (CTP). Previously, he led the CDC’s evaluation of EVALI and looks partly responsible for wrongly linking the outbreak to nicotine vaping. Publicly, he remains extremely critical of new forms of nicotine products. This is the man who will be responsible for overseeing ongoing reviews of Premarket Tobacco Product Applications (PMTAs).

The director’s response talks of how welcoming the CTP was to the independent review from the expert panel. It also expresses a commitment to address the report’s recommendations as expeditiously as possible. You might doubt how fast that will be since the public response took 3 months to produce. And in classic reactive fashion, in an effort to pivot from reactive to proactive, as recommended by the report, the CTP will be collaborating with countless groups to develop a comprehensive 5-year strategic plan. Such planning is estimated to take until the end of this year. To boot, the director also acknowledged that acting on many other recommendations will take time to complete since they require working with groups outside of the CTP and even others outside of the FDA entirely.

It all sounds painfully slow, and yet, just last week, the FDA proposed new requirements for tobacco product manufacturing practices. Make no mistake about it, this proposal benefits large-scale manufacturers with the experience and resources to oblige. Telling.

Looking at the comprehensive list of recommendations and corresponding actions is even more interesting:

Cross-Cutting (3 recommendations; 5 actions)
Science and Application Review (3 recommendations; 5 actions)
Regulation and Guidance (1 recommendation; 3 actions)
Compliance and Enforcement (5 recommendations; 6 actions)
Public Education Campaigns (1 recommendation; 2 actions)
Resources (2 recommendations; 5 actions)

You’ll notice that Compliance and Enforcement has the highest number of recommendations, 5. That certainly caught my attention. Those recommendations are as follows:

Establish an Interagency Task Force to Make Enforcement a Priority
Consider Statutory Changes to Streamline Tobacco Enforcement Processes
Explore Alternative Approaches to Compliance
Enhance Communication to Provide Greater Transparency on Compliance and Enforcement
Ensure Workplan and Goals Reflect New Priorities

What’s doubly attention-grabbing is that while many of the other categories have expected future implementation dates and some have no date at all, 5 of the 6 Compliance and Enforcement actions are stated to be effective immediately.

There are two related actions that stand out most:

Effective immediately, FDA will begin planning to convene a summit related to enforcement with senior officials from U.S. Department of Health and Human Services (HHS) Office of General Counsel (OGC) (including FDA Office of Chief Counsel), FDA Office of the Commissioner, CTP, and Department of Justice (DOJ).

Effective immediately, FDA plans to continue activities with other government agencies and organizations to enhance enforcement and compliance activities. In addition to DOJ, these agencies and organizations include, but are not limited to: U.S Customs and Border Protection, the U.S. Postal Service, the Federal Trade Commission, Bureau of Alcohol, Tobacco, Firearms and Explosives, as well as with our compliance and enforcement partners at the state/local/territorial/tribal levels.

The ‘effective immediately’ designation should also be taken with a grain of salt, as the CTP has reminded us that if certain statutory changes are needed to aid enforcement, it will coordinate with related governmental offices and the administration to seek changes from Congress. Looking at Congress, that may prove to be slow, if not impossible. However, there is already an expansive Compliance and Enforcement toolbox, and recent behaviors show some of those tools being dusted off and used.

In October 2022, the DOJ, on behalf of the FDA, federally filed complaints for permanent injunctions against 6 e-cigarette manufacturers. These were the first injunctions of their kind. And then just last month, the FDA filed civil money penalty (CMP) complaints against 4 e-cigarette manufacturers. Also a first of their kind.

Could this merely be the start of a larger enforcement push?

The CTP’s response to the Reagan-Udall Report reminds us of just how few new products on the market are actually authorized (emphasis added):

CTP has made enormous progress in Premarket Tobacco Application (PMTA) reviews, although there is much work still to do; to date, the agency has made important progress in the review of e-cigarette products, authorizing several tobacco-flavored e-cigarette products and devices and rejecting marketing applications for millions of products that did not meet the requirements in the law. While CTP has always worked to ensure our reviews are based on science and supported by our regulations, there are opportunities to enhance efficiency of the PMTA review process.

Out of the millions of applications, only a short list has received Marketing Granted Orders. And mind you, since Brian King has become director of the CTP last year, 0 additional e-vapor products have received MGO authorization through the PMTA pathway.

A real shift?

Moving forward, we should expect and appreciate improved communications and transparency from the CTP. However, the PMTA review process may remain a nearly impossible hurdle for quite some time. Yes, having clear and unchanging requirements will make successful authorization feel like less of a moving target, but increased transparency is bound to reveal that the rigorous scientific substantiation needed for successful authorization is still intact. After all, mistakes concerning product authorization made by the FDA not only put the health of the public at risk but the agency’s reputation and credibility as well.

If cross-cutting and guidance take full priority, even over other actions listed as effective immediately, perhaps things look more stagnant. After all, it’s been over 5 years since the last time the FDA announced a comprehensive regulatory plan, and many of its goals are still the same issues of today (emphasis added):

To complement these larger policy considerations, the FDA plans to issue foundational rules to make the product review process more efficient, predictable, and transparent for manufacturers, while upholding the agency’s public health mission.

On the other hand, if compliance and enforcement fully accelerate before science and application review can be radically improved, a majority of market participants will face an even more impossible battle. That seems more likely since enforcement currently looks to have the fewest roadblocks and the greatest support. Either way, different pieces evolving at very different paces may add additional strain to the system, as the words of former FDA commissioner Scott Gottlieb in the 2017 regulatory plan announcement still ring true:

Our approach to nicotine must be accompanied by a firm foundation of rules and standards for newly-regulated products. To be successful all of these steps must be done in concert and not in isolation.

The only certainty is that firing up idle parts of this regulatory machine, paired with the dual exhaust pipes of increased communication and transparency, will lead to turbocharged sensationalist headlines, regardless of underlying materiality. Most ironically, those headlines are likely to drive volatility up and multiples down for the publicly traded tobacco names despite the fact that many potential regulatory outcomes would benefit those very same companies the most.

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Ownership Disclaimer

I own positions in Altria and other tobacco companies such as British American Tobacco and Philip Morris International.

Disclaimer

This publication’s content is for entertainment and educational purposes only. I am not a licensed investment professional. Nothing produced under the Invariant brand should be thought of as investment advice. Do your own research. All content is subject to interpretation.

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