Tobacco companies mired in legislation and taxes

Cigarette makers fight back with lobbying efforts and smokeless products.

By Trefis May 31, 2012 2:46PM
TrefisImage: Man smoking (© Steve Mason/Photodisc Blue/Getty Images)Tobacco companies are finding it difficult to endure the slew of proposed legislation and increased taxation slapped against them worldwide. They are already plagued with high levels of taxation as they are increasingly blamed for soaring healthcare-related costs.

The proposed tax hike on cigarettes in California, if passed, would see the excise taxes rising to $1.87 per cigarette pack. Public figures like Lance Armstrong have pledged their support for the proposed tax hike.

To oppose the increase in excise tax, tobacco companies, led by Altria Group (MO) and Reynolds American Inc (RAI), have spent more than $40 million on lobbying. Altria alone has put in more than $27 million.

We have a $32.60 price estimate for Altria, which is in line with the current market price.

Internationally, New Zealand plans to become the first smoke-free country by increasing the tobacco taxes by 40% over the next four years, with an increase of 10% each year. Smoking rates are down from 30% in 1986 to around 20% currently, and the country plans to kick out tobacco consumption by 2025.

Altria recently introduced a new product called Verve -- a chewable, spit-free, oral product that contains nicotine but no tobacco -- in select U.S. markets. The move is in line with the company's policy of developing lower risk, smokeless products.

The company has even entered into an agreement with Okono, an affiliate of Fertin Pharma, to develop innovative non-combustible nicotine-containing products. Smokeless tobacco products are generally perceived to be less harmful than cigarettes and attract lower excise duties. However, even the smokeless tobacco products have come under the scanner of late with a key advisory to the U.S. Food and Drug Administration (FDA) suggesting that tobacco companies have no sufficient evidence to prove that these products are any less harmful than cigarettes.

Altria Smokeless Products Market Size in US

Philip Morris International (PM), however, is relatively shielded as most of the proposed legislation against the tobacco industry is in the developed world. Asia-Pacific overtook Europe as the highest revenue-generating region for the company in 2011. Regulations are still lax in developing economies and, unlike their western counterparts, demand for cigarettes is growing. Note that the company only operates outside the U.S.

Philip Morris International Asia Cigarettes Market Volume

In Australia, tobacco companies including Philip Morris International are already embroiled in a legal battle with the government over a law that mandates plain packaging of cigarettes. Both Australia and New Zealand aren't the biggest markets for Philip Morris International. However, if these proposed taxes and legislation were to trickle to more important markets such as Indonesia, Japan or South Korea, we could see some downside to our price estimate.

We have a $99 price estimate for Philip Morris International, which is more than 15% above current market price.

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