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Updated: June 18, 2019

Morgan Stanley: Tobacco industry profit could be cut in half if FDA cracks down on nicotine

US regulators have proposed limits on the amount of nicotine allowed in cigarettes. If enacted, the tobacco industry could lose $165 billion in profit within the next 15 years, according to a new report.

The Food and Drug Administration is set to publish new rules in October that make cigarettes "minimally addictive." The FDA could achieve that goal by enacting a "maximum nicotine level."

Morgan Stanley analysts said capping nicotine would be a "gamechanger" and a "negative catalyst" for the industry.

If the proposal is enacted by 2035, profits for tobacco companies could be cut by 50%, the analysts said. Specifically, Altria and British American Tobacco could have their market values slashed by 20% and 13%, respectively.

Morgan Stanley said Altria is "most at risk" if the rules are enacted by 2035 but said the company is also the "best placed to benefit from a transition to alternative products" because of its $13 billion investment in Juul. As for British American Tobacco, the potential rules would be less significant since it has "limited exposure" in the US with only 40% of its profits made in the country.

The firm also downgraded British American Tobacco's stock to "underweight."

Further pressuring companies are factors including new entrants like e-cigarettes such as Juul, and adults kicking the habit of cigarette smoking. Analysts predicted that smoking will drop from 34 million adults currently to 14 million by 2030. It forecasts that a pack of cigarettes could cost $16 by 2035.

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