Fitch: FDA Oversight of Tobacco to Benefit Established Brands

CHICAGO--(Business Wire)--
As a result of pending legislation, the U.S. Food and Drug Administration (FDA)
is expected to gain oversight of the tobacco industry. According to a new report
by Fitch Ratings, FDA regulation will have intermediate and longer-term
competitive effects on the key players in the tobacco sector. While very little
is expected to change for the tobacco industry in the short term, more changes
are likely in the intermediate term with industry participants expected to face
compliance costs, which will disproportionately affect smaller players due to
the burden of additional fixed administrative costs. In addition, larger
industry participants with established brands are likely to benefit from
potentially greater advertising restrictions.

"Given that today's tobacco products are grandfathered into the legislation and
tobacco products will continue to be sold in retail outlets, we do not expect
any significant immediate effects on the sector," said Christopher Collins,
Associate Director at Fitch Ratings. "However, looking further ahead as more
restrictive advertising limits are imposed on all tobacco products, not just
cigarettes, the brands with large market share will maintain those shares."

Longer term, the new legislation could lead to an expedited release of modified
or reduced-risk tobacco products being marketed by the tobacco industry. Fitch
believes that the reduced-risk products will face a number of hurdles, including
current tobacco users continuing to use today's tobacco products despite the
benefits that these modified-risk products offer. Another expected obstacle is
the formal introduction of these new reduced-risk products, which may prove
difficult as current advertising and sale restrictions for tobacco products
remain in place and may be enhanced by the FDA.

Smoking bans are another complication for these new products, as the three
largest cities in the United States, New York, Chicago and Los Angeles,
currently have comprehensive bans in effect which prohibit any smoking product
usage. Furthermore, these new products will have to be socially accepted in
order for them to reach new customers.

"Nonetheless, creating a regulatory framework particularly for the introduction
new products may revitalize the U.S tobacco industry, where the consumption of
its primary product, cigarettes, has been declining for over a decade," said
Wesley E. Moultrie, Senior Director at Fitch Ratings.

Should modified-risk products achieve acceptance and gain tobacco product market
share, sizeable shifts in the tobacco industry are possible. First-movers,
including Altria Group, Inc. and Reynolds American Inc., will most likely
benefit if these products are successful.

The full report, 'FDA Regulation Revisited: Anticipated Effects of FDA Oversight
of Tobacco,' is available on the Fitch Ratings web site, www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, www.fitchratings.com. Published ratings, criteria and
methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings, Chicago
Wesley E. Moultrie II, CPA, +1-312-368-3186
Christopher M. Collins, +1-312-368-3196
Media Relations, New York
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com

Copyright Business Wire 2009