Kaival Brands Innovation Group Inc. (OTCMKTS: KAVL) ripped to an all time high of $3.65 last week after announcing FDA Premarket Tobacco Product Application (PMTA) acceptance of their entire line of Bidi Stick products. There were 15,437 PMTA’s filed in the past two years. This advanced the company to the “substantial review” stage which is right before the FDA makes a marketing approval. The company joins an elite list of vapes in the substantial review stage like Air Factory, E-Alternative Solutions, JUUL, Nicopure Labs, and Flavored E-Liquid. Only 8 manufactures currently have marketing approval. Many investors may not realize the fact that vape products are in fact regulated by the FDA. Perhaps the requirement which went into effect on September 9, 2020 was not well publicized because there are so few publicly traded vape companies.
Fragmented Vape Market
Turning Point Brands (NYSE: TPB) is the most well known name, which is in new high territory and comprises 3 business segments. Turning Point Brands has 7 vape brands that contribute $156 million in revenue annually. The stalwart cigarette brands like Altria (NYSE: MO) have exposure to vaping through a minority interest in Juul and British American Tobacco (NYSE: BTI) which has a minor $2.0 billion in sales from non-traditional tobacco products like the heat-not-burn tobacco and vaping. Besides KAVL the only other pure play is RLX Technology (NYSE: RLX) which is a pure play on vaping in China, where the regulatory climate is much more accommodating. There are thousands of smaller private companies that could be ripe for consolidation as the rigors of the regulatory process may weigh heavily on the smaller brands.
Regulation Creates Even Playing Field
The wild west of vaping products came to an end on September 9, 2020 which was the final deadline for Premarket Tobacco Product Applications (PMTA’s) for electronic nicotine delivery systems (ENDS) like electronic cigarettes. The “Deeming Rule” enacted in 2016 labeled e-cigarette as tobacco products that are regulated by the FDA. When FDA commission Gottleib was appointed he announced a major initiative to remake the industry. He shocked many when he said
“WE NEED TO REDOUBLE EFFORTS TO HELP MORE SMOKERS BECOME TOBACCO-FREE, AND, WE NEED TO HAVE THE SCIENCE BASE TO EXPLORE THE POTENTIAL TO MOVE CURRENT SMOKERS – UNABLE OR UNWILLING TO QUIT – TO LESS HARMFUL PRODUCTS, IF THEY CAN’T QUIT ALTOGETHER. AT ALL TIMES, WE MUST PROTECT KIDS FROM THE DANGERS OF TOBACCO USE.”
PMTA Review Process
A PMTA is a type of application for any new tobacco product seeking an FDA marketing order. The FDA expects all premarket applications for electronic nicotine delivery systems (ENDS) products will be submitted through the PMTA pathway. However, the FDA has also issued authorizations for combustible cigarettes, smokeless tobacco and non-combusted cigarettes through the PMTA pathway.
Under the PMTA pathway, manufacturers or importers must demonstrate to the agency, among other things, that marketing of the new tobacco product(s) would be appropriate for the protection of the public health. That statutory standard requires the FDA to consider the risks and benefits to the population as a whole, including users and non-users of tobacco products. The agency’s evaluation includes such things as reviewing a tobacco product’s components, ingredients, additives, constituents, toxicological profile and health impact, as well as how the product is manufactured, packaged and labeled, findings from consumer perception research (if conducted), and the applicant’s description of marketing plans for the product.
The PMTA final rule helps ensure these applications contain sufficient information for the FDA’s evaluation, including details on the physical aspects of a tobacco product and information on the product’s potential public health risks. The final rule describes the information an applicant must include in a PMTA for the FDA to complete a substantive review of an application. It also formalizes both the procedures the agency will follow when reviewing PMTAs and the postmarket reporting requirements for applicants that receive marketing granted orders. The final rule also requires tobacco product manufacturers to keep records establishing that their tobacco products are legally marketed, such as documents showing that a tobacco product is not required to undergo premarket review or has received premarket authorization. To read more on the process, and the final rule, click here.
The regulatory risk has not disappeared, but getting to the substantive review phase is a key win. Although only 8 manufacturers have gotten FDA marketing approval none have been denied which means the odds of approval are quite good once getting to this phase. KAVL has done everything by the book and stayed away from controversy, which is why they are the largest brand you never heard of, but that could change as they recently announced a tripling of their distribution network. It is fair to say that the industry is going to go through a consolidation phase because it is so fragmented. There were over 15,000 product applications for e-cigarettes if the average company had 10 SKU’s that represents 1500 companies in a growing market. Although KAVL has not made any brand acquisitions it may be time as they use their corporate knowledge to help other brands navigate the approval process. The largest player in the space is RLX and they happen to also be the largest pure play in China. It’s reasonable to think that RLX would want to expand in the United States, and that means that KAVL may be a target of their next acquisition should they pursue a roll up strategy that seems ripe for the picking.
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