Split over tougher rules on tobacco

Member states water down Commission proposal, but MEPs want stricter rules. Member states and MEPs are on a collision course over proposed rules to strengthen tobacco controls in the European Union. On Friday (21 June), health ministers voted to slightly water down the European Commission's proposal on tobacco rules. But MEPs want tougher rules that go further than the Commission's proposal.

Ministers removed from the Commission's proposal a ban on slim cigarettes. However, they said these cigarettes should be sold in normal-sized packets to reduce their appeal to young people.

The ministers backed a proposed ban on flavoured cigarettes, including menthol. They also backed a requirement for large pictorial warnings to be printed on all cigarette packets, but reduced the amount that would have to be covered from 75% to 65%. The compromises were made to ease the concerns of central and eastern European member states that believe the restrictions would harm their economies. But the amendments failed to satisfy Bulgaria, the Czech Republic, Poland and Romania, which voted against the Council's position.

Speaking after the vote, Tonio Borg, the European commissioner for health, said the Council's position respected the intent behind the Commission's proposal. “The main thrust is that tobacco should look like tobacco, not like perfume or candy, and that it should taste like tobacco as well,” he said. But many MEPs want tougher rules. British centre-left MEP Linda McAvan, who will lead the Parliament's negotiating team, wants the EU to ban the use of logos and trademarks, and force all cigarettes to adopt ‘plain packaging'.

The Parliament's environment and health committee, which is responsible for the dossier, will vote on 10 July. The committee tends to take a strong line on such issues – but other parliamentary committees rejected the most ambitious anti-smoking amendments in advisory opinions last week.

E-cigarettes

There is likely to be disagreement on electronic cigarettes, which are largely unregulated in the EU. The Commission has proposed that e-cigarettes containing 4 milligrammes or more of nicotine must be classed as medicinal products. Health campaigners said such a move could hurt a product that many people use to help them quit smoking. But ministers voted to make the rules on e-cigarettes even tougher, lowering the threshold to 1mg.

Source: By Dave Keating http://www.europeanvoice.com/article/imported/split-over-tougher-rules-on-tobacco/77667.aspx

Minnesota poll shows support for tax hikes on cigarettes, wealthy

A new poll of Minnesotans found broad support for the tax hikes on wealthy residents and cigarette smokers that Gov. Mark Dayton and the Democratic Legislature approved last month. The Star Tribune's Minnesota Poll, published Tuesday, showed that 58 percent of respondents supported the income tax increase on roughly the top 2 percent of income earners. Even more respondents, 64 percent, backed the $1.60 per pack hike in the cigarette tax. The income tax was opposed by 36 percent of respondents, while 32 percent opposed the higher cigarette tax. The poll surveyed 800 adults by phone from June 11 to June 13, and had an error margin of plus or minus 3.5 percentage points. The strong backing for both measures may reflect that they affect only small fractions of the greater population. Republicans in the House and Senate fought the tax increases, which were the two chief components of a tax bill that is projected to raise $2.1 billion in new revenue over the next two years. Republicans argued the additional tax money was not needed and would harm the state's economy. House Speaker Paul Thissen, a Minneapolis Democrat, said the poll showed that residents understood the need to raise more revenue in order to spend it on education and job creation, "and that we found a fair and acceptable way to do that." House Minority Leader Kurt Daudt, R-Crown, said the poll reflects that the tax hikes are narrowly targeted. But he argued that they "frankly will hurt Minnesota's economy and hurt hardworking Minnesota families." Bruce Jawer, a poll respondent from Rochester, told the Star Tribune that he backed the cigarette tax increase because health problems caused by smoking cost the state money. And he backed the income-tax hike even though he said he may fall into the "upper-income" tax category at times. "Folks who make more money have a duty to contribute more to the welfare of the country and the state," said Jawer, an educational administrator for Mayo Clinic. "History shows that when things get too out of balance between the rich and the poor, it leads to instability." But Tom Penn, a small business owner from Excelsior, said the income tax hikes could hurt enterprises like his, in which business income is taxed as personal income. "If you're raising taxes, you're preventing us from reinvesting in the business," he said. Penn said he doesn't necessarily oppose cigarette tax hikes, but argued that similar items such as liquor should have been subject to the same increase. The Legislature and Dayton set a new tax rate of 9.85 percent on income above $250,000 for couples and above $150,000 for individuals, a 2 percent increase over the current rate. Income below those levels will continue to be taxed at existing rates. The $1.60 cigarette tax increase will be added to the state's current per-pack tax of $1.23. The Minnesota Department of Health estimates about 16 percent of Minnesota adults are smokers.

E-Cigarettes Fire Up Investors, Regulators

A group including Silicon Valley entrepreneur Sean Parker is investing $75 million in a leading maker of electronic cigarettes, part of a wave of money firing up a market that is under increasing regulatory scrutiny. The market for e-cigarettes—battery-powered devices that turn heated, nicotine-laced liquid into vapor—is small but growing rapidly, in part because they are increasingly seen as less harmful than conventional cigarettes. Mr. Parker, who co-founded the music-sharing site Napster and was the first president of Facebook Inc., is part of an investment group acquiring a minority stake in Scottsdale, Ariz.-based NJOY Inc., one of dozens of e-cigarette companies that have surfaced since 2006. "There's a huge opportunity to transition the entire world away from dangerous, carcinogenic, combating cigarettes," said Mr. Parker, who has been a big donor to cancer research, in an interview. E-cigarettes, unlike traditional smokes, currently aren't federally regulated. The Food and Drug Administration warned consumers in 2009 the new technology could pose its own health risks and required further study. The agency has said it is planning regulations that would treat them as tobacco products, but has provided no details. In an interview last week, FDA tobacco czar Mitch Zeller described the e-cigarette market as "the wild, wild West" in terms of regulation. More than a dozen states, including Arkansas, Colorado and Maryland, have banned e-cigarette sales to minors. New Jersey, North Dakota and Utah have outlawed their use in enclosed public spaces. A bill approved by California's state senate in May would bring e-cigarettes under smoke-free laws covering public buildings, workplaces and restaurants. Boston, Seattle and Indianapolis have extended their smoking bans to the devices. Airlines don't allow e-cigarettes, nor do Amtrak or Starbucks Corp. SBUX +0.56% For current smokers, e-cigarettes are believed to be less harmful than traditional smokes, which release most of their toxins through combustion. But some studies indicate nicotine, the addictive agent in cigarettes and in the new devices, may harm fetuses. The long-term impact of inhaling e-cigarette vapor, which contains other substances such as propylene glycol, has yet to be determined. Among the questions faced by federal regulators: Could e-cigarettes, which currently offer flavors such as chocolate, strawberry and piña colada, serve as a gateway to traditional cigarettes for young people? Will longtime smokers use them only to get a nicotine fix where regular smoking is banned? What kind of age restrictions and warnings should they carry? And what about advertising? The FDA's Mr. Zeller declined to comment on what future regulations might look like or when they will be proposed. E-cigarette sellers aren't currently allowed to make health or smoking cessation claims. The European Union also is considering limits on e-cigarette sales, and France's health minister said last month the government would impose the same curbs on them as on conventional cigarettes. E-cigarettes are already restricted in Mexico, Brazil and several Asian countries. The potential market for e-cigarettes is huge. Despite new regulation of cigarettes and stepped-up public health campaigns urging Americans to quit, nearly one in five American adults still smoke. E-cigarettes more closely mimic smoking than do other smokeless products such as moist snuff or nicotine patches. Industry experts say U.S. retail sales of e-cigarettes could reach $1 billion this year, just 1% of the country's cigarette market but twice that of 2012, as they spread from the Internet to store shelves and generate buzz through television advertisements and celebrity endorsements. Sales of traditional cigarettes have been falling as public-health officials mount graphic advertising campaigns and push to expand bans on smoking in public places, and as federal and state tax increases have raised cigarette prices. NJOY, the company in which Mr. Parker is investing, is a top-selling brand. Although industrywide sales numbers are scarce, NJOY captured 35.6% of the $36.4 million in U.S. convenience-store sales in the four weeks ended May 11, according to Wells Fargo Securities, citing Nielsen scanner data. Lorillard's blu had a 33.9% share, followed by the privately held LOGIC and 21st Century brands, with 13.8% and 7.4%, respectively. Mr. Parker is investing nearly $10 million. Homewood Capital, a New York investment fund headed by Douglas Teitelbaum, is investing nearly $40 million. Boston-based Fidelity Investments is contributing about $25 million. And Founders Fund, a San Francisco venture-capital fund started by PayPal co-founder Peter Thiel, is kicking in roughly $5 million. Mr. Thiel helped finance the 2005 film "Thank You for Smoking," a satire about the cigarette industry. Mr. Teitelbaum, former head of hedge fund Bay Harbour Management, says he began exploring an investment in e-cigarettes after deciding the category could be a game-changer and that NJOY's product was impressive. "It's clear they have the flavor right, the look and feel of the cigarette right, the branding and packaging right," said Mr. Teitelbaum, who says he smoked traditional cigarettes for more than 30 years before switching to NJOY Kings a few months ago. Unlike many rival e-cigarettes that are made of metal and weigh and look more like fountain pens, NJOY Kings more closely resemble regular cigarettes. The disposable cigarette retails for $7.99 and promises to last roughly as long as two packs of traditional cigarettes. The company has been advertising on TV and has attracted celebrity endorsers such as musicians Courtney Love and Bruno Mars. In March, former U.S. Surgeon General Richard Carmona joined NJOY's board. As the government's top physician, Mr. Carmona had highlighted the dangers of secondhand smoke and supported an outright ban of tobacco products. After joining NJOY, Mr. Carmona said it is important to explore alternatives to traditional cigarettes because the adult smoking rate has remained stuck at around 20%. More study is needed on the health effect of e-cigarettes, he said, but "initial information certainly suggests there is significant potential for harm reduction." He added that e-cigarettes could be another tool to get more people to quit.

Imperial's Stock Could Be Habit-Forming

Consumer-staples stocks have become the latest addiction on Wall Street. But when it comes to some tobacco stocks, investors have resisted the urge. They should give in to temptation.

Consider shares of Procter & Gamble PG -1.18% and Clorox, CLX -0.90% which have both rallied in recent months as risk-averse investors chased after yield and steady, if only modest, profit growth. Both sport dividend yields of about 3%, and analysts expect earnings to expand by midsingle-digit percentages this year. The stocks both trade at about 19 times forward earnings, the highest level in several years. By some measures, Imperial Tobacco Group IMT.LN +0.94% looks a lot like P&G or Clorox. Imperial, which manufactures cigarette brands like Davidoff and Gauloises, has managed to increase profit by raising prices to offset a long-standing decline in smoking in developed markets. The stock offers a healthy dividend yield of almost 5%, and analysts expect earnings per share to increase 4.5% in the year through September. And yet, Imperial trades at just 11 times 2013 earnings. The problem? Investors are still skittish about Europe, which accounts for roughly 60% of the company's operating income.

A persistent problem in Europe is the unemployment rate, which is in the double digits across the region and has crept above 25% in Spain. At the same time, several governments have raised taxes on cigarettes in order to reduce fiscal strains brought on by the financial crisis. Those factors have added to the pressure pushing down on cigarette sales. While Imperial can try raising prices, this has become harder due to surging sales of illegal cigarettes. These can sell for a fraction of normal prices because they don't include taxes. According to a study by KPMG, counterfeit and contraband sales accounted for 11.1% of European cigarette consumption last year, up from 8.3% in 2006.

The question for investors is whether the illegal-cigarette problem will get worse. As the forgone tax revenue mounts, some governments should take notice, especially in countries such as the U.K. that tax cigarettes heavily. Legal cigarette consumption there dropped by 3.2 billion sticks last year, while illegal sales rose by roughly the same amount, KPMG estimates. Matthew Grainger of Morgan Stanley MS -0.48% says there are a limited number of entry points for cigarette trafficking into Western Europe. That suggests that even a small step up in enforcement efforts could go a long way.

Even if it takes time for Imperial's European woes to ease, it is hard to imagine the stock sinking much further. One reason: Other cigarette companies that also face volume declines may become intrigued by Imperial's low valuation. Combining Imperial with another tobacco conglomerate could lead to ample cost savings in markets where they have overlapping production and distribution. While there might be antitrust issues in some regions, there may be ways to divide the company. As Martin Deboo of Investec points out, Diageo DGE.LN -0.86% andPernod Ricard RI.FR -0.59% overcame a similar obstacle by dividing up several Seagram brands in the early part of the last decade. It is true that tobacco stocks tend to trade at a discount to other consumer staples, given the risk of regulatory changes affecting marketing and advertising. But Imperial rival British American Tobacco, BATS.LN -0.68% which generates roughly 30% of operating income in Europe, trades north of 16 times 2013 earnings a 52% premium. Investors who left Imperial on the shelf may soon find their cravings return.

Source: By JOHN JANNARONE http://online.wsj.com/article/SB10001424127887323398204578489321623762266.html