The Stogie Guys

Late yesterday reports broke that U.S. Food & Drug Administration (FDA) Commissioner Scott Gottlieb would be resigning his position next month. The move comes less than two years after Gottlieb was confirmed to the position in May 2017.

According to a Washington Post report, Gottlieb’s resignation didn’t come at the request of the the White House. President Trump tweeted praise of Gottlieb’s job at the FDA. “Scott has helped us to lower drug prices, get a record number of generic drugs approved and onto the market, and so many other things.”

Gottlieb, who had been commuting from Connecticut weekly, told the Post it was a difficult decision. “This is the best job I will ever have. I’m leaving because I need to spend time with my family. I get home late Friday, work on weekends, and come back to Washington on Sunday.”

Gottlieb’s confirmation was supported by cigar industry groups based on his prior writings questioning the logic of FDA tobacco cigar regulations. But his time at the FDA was a mixed bag for cigars. Gottlieb came into the job known for a “harm reduction” approach to tobacco regulations.

One of Gottlieb’s first acts was to delay upcoming deadlines for implementing the FDA’s Deeming Rule, which included new cigars. He later initiated another round of rule-making on whether the FDA should adopt an exemption for premium cigars. Later, Gottlieb pushed for a ban on flavored tobacco products.

Next Commissioner Faces Big Decisions on Cigar Regulations

Gottlieb’s departure leaves the next head of the FDA to make major decisions regarding the FDA’s oversight of premium cigars. A permanent replacement for Gottlieb would need to go through a Senate confirmation process, which would take months given the backlog of other nominees awaiting confirmation votes. An acting commissioner could be named more quickly, but no decisions have been made about who would fill the post.

The FDA could issue a final rule on the premium cigar exemption any day now and, unless it comes in the next month, it may be one of the first big decisions made by the next commissioner. If a final rule isn’t issued before late spring 2020, the rule can be overturned using the Congressional Review Act by a new Congress and president after the 2020 elections.

The next commissioner would also be primed to make final rulings on flavored tobacco products and on an FDA initiative for reduced nicotine tobacco products. Cigar industry groups would do well to lobby the White House for a nominee who is likely to issue premium cigars a long sought-after exemption from FDA rules.

–Patrick S

photo credits: Stogie Guys

In two weeks the annual International Premium Cigar and Pipe Retailers (IPCPR) Trade Show will be in full swing. In more than one ways, this year’s show represents a new era. Here’s why:

New Venue

Although the Trade Show isn’t held every year in Las Vegas, there is little question the Las Vegas Sands Expo Center has been its de facto home for the past decade. The convention was originally set to return there again this year. However, late last year IPCPR announced not only was the show being moved up five days, it was moving up The Strip (and a block off it) to the Las Vegas Convention Center (LVCC).

While the LVCC is larger than Sands Expo, it is also off The Strip, meaning transportation to and from the venue is more challenging. The Sands Expo is attached to both the Venetian and Palazzo hotels. While the LVCC isn’t attached to a hotel, it is across from the Westgate Resort and Casino (formerly called the Las Vegas Hilton), which is the primary hotel for this year’s event and host to most of the opening day seminars and the breakfast featuring former New York mayor and presidential candidate Rudy Giuliani. If the new location goes off without a hitch, it could be a win in the long run for IPCPR since they would have two proven locations in Las Vegas.

New Regulations

Last year’s Trade Show took place weeks before the FDA regulations went into effect. Now, even though some enforcement has been delayed, the rules are in effect. The IPCPR has announced that the FDA’s ban on samples for consumers doesn’t effect samples at the convention since the show is only open to the industry and not to the public.

The biggest part of the rules, however, will have a large impact on the event. Usually, numerous new cigars are announced or debuted at the Trade Show, but the FDA rules mean cigars introduced after August 8, 2016, need to go through an FDA approval process before they can legally be sold. It also means cigars introduced since early 2007 will eventually need to either win FDA approval or be removed from the market. One of the interesting things to watch for is how many post-2007 cigars are removed from manufacturers’ offer sheets, especially in light of some hope in the industry that the regulations could be scaled back by the new administration or through litigation.

New Releases

Since any new cigars will need to go through a yet-to-be-defined FDA approval process, there won’t be any new cigars at the Trade Show, right? Not exactly. Since last August, and especially in the past few months, we’ve seen a steady number of “new” cigars announced, with many scheduled to debut at the upcoming show.

Cigar manufacturers knew the regulations were coming and they’ve planned to mitigate the regulations as best they can. One of the ways they’ve done this is though stealth cigar releases prior to the August 2016 deadline. While these cigars may have been sold to a friendly retailer to establish they were on the market in advance of the cutoff date, they haven’t been formally or widely released. This will account for many of the “new” cigars that will be available for the first time at the Trade Show. That said, the number of new releases compared to previous years will be something many observers will be watching closely.

–Patrick S

photo credit: IPCPR

Although no one knew it at the time, one of most important dates for cigars sold within the United States would be February 15, 2007. Under the Tobacco Control Act and subsequent rulemaking, cigars marketed before that date are grandfathered in as exempt from FDA regulations, while those introduced afterwards will eventually need FDA approval to be legally sold and marketed within the U.S.

Although a determination of grandfather status isn’t yet needed for a cigar to be sold without going through one of the FDA approval tracks, the FDA has begun accepting submissions requesting a grandfathered status review of a tobacco product regulated under the deeming regulations that went into effect last year. Earlier this month, the FDA issued the first such determinations for 13 handmade cigars.

Two companies had cigar products established as grandfathered and thus exempt from FDA approval rules: Altadis USA, one of the largest sellers of handmade cigars in the United States, and Ortega Premium Cigars, a boutique company.

Altadis submitted five cigars from five different brands, each in a corona format: Montecristo Classic Collection Especial No. 1, Romeo y Julieta 1875 Exhibicion No. 1, H. Upmann Vintage Cameroon Corona, Saint Luis Rey Corona, and Don Mateo Natural No. 5 (a bundle cigar). The approach of establishing one size first may be a legal strategy, with the company likely to next seek to expand grandfather determinations to other formats.

Ortega Premium Cigars received grandfather determinations for four sizes in each of two brands: VIBE and REO. In 2007, VIBE and REO were under EO Brands, then co-owned by current VIBE and REO owner Eddie Ortega with his former business partner Erik Espinoza. Both cigars were collaborations between EO and Rocky Patel.

The Ortega determinations were shepherded through by attorney Frank Herrera, whose boutique law firm specializes in cigar trademark and FDA compliance issues. Ninety-eight other cigars have also received grandfather determinations, but those cigars would not be considered handmade or premium cigars.

FDA-Funded Study Confirms Minors Not Smoking Premium Cigars

One of the main arguments against the deeming rules that regulate premium cigars in a similar manner as cigarettes is that youth smoking of premium cigars is not an issue. This is also a reason frequently cited for the need for legislation exempting handmade cigars from FDA regulations.

Even the studies cited by the FDA when they rejected a proposed exemption for premium cigars over a certain price did not point to handmade cigar usage by minors, but relied on a more nebulous “youth and young adults.” As we noted at the time, that included usage rates for adults as old as 29.

A recent study published in the prestigious New England Journal of Medicine buoys the arguments made by opponents of FDA regulation of traditional cigars. The study was funded by the National Institute on Drug Abuse and the Food and Drug Administration and conducted by the Department of Health Behavior of the Roswell Park Cancer Institute in Buffalo, New York.

As reported elsewhere, the study shows extremely low usage rates (2.3%) among those aged between 12 and 18, even with  extremely broad definitions of usage (even just “one or two puffs” ever). Fewer than one percent of the 13,651 youth surveyed said they used a cigar once (even “just one or two puffs”) in the 30 days prior to being surveyed.

A deeper look at the study’s numbers shows even less cause for concern for youth smoking of cigars. Of the tiny percentage of those who claim to use traditional cigars virtually all used other tobacco products too, while the number who exclusively used traditional cigars was so small that “estimates were suppressed” because the number was not statistically significant.

Though the conclusion that youth smoking of traditional cigars is virtually zero came as no surprise to those in the handmade cigar community, having FDA-funded research to back up these claims may prove useful in lobbying for the FDA to ease regulations on handmade cigars and for pushing Congress to pass an exemption.

–Patrick S

photo credits: Stogie Guys

Cigar companies have a big problem. Nearly every business decision they make is impacted by FDA regulations, but the full details of those regulations haven’t yet been determined.

The 499-page deeming regulation finalized last spring officially took effect August 8. While that document provides an outline for the agency’s intentions, it leaves out many important compliance details. Even where guidance documents have been issued, the standards laid out in those documents are not legally binding (i.e., they can be changed at any time). And many other critical questions have not been addressed at all.

The resulting unpredictable cost of compliance is a serious issue for all cigar makers. The burden hits smaller brands the hardest, however, because they are least able to cope with such uncertainty. While FDA user fees are distributed proportionally according to each company’s market share, the unknown cost of successfully applying for FDA approval for a particular tobacco product will effectively be the same whether the company sells a few hundred units per year, or hundreds of thousands of units.

In a recent discussion of the ongoing process of complying with the FDA, Skip Martin of RoMa Craft Tobac described the problem cigar makers big and small face: “What we don’t know is how much that [Substantial Equivalence approval] process will cost us. We don’t know the details of what a substantial equivalence process will look like because there has never been one approved for a cigar ever.”

Even as the FDA delays many deadlines, small companies face tough choices. With product registration deadlines fast approaching, companies have to decide how much to invest in such registrations. Assuming the worst and providing numerous highly detailed registrations may maximize the likelihood of the registrations being approved. But it also increases the costs.

While the cost of gaining FDA approval—most likely through the Substantial Equivalence (SE) pathway, or by being a grandfathered pre-2007 product—is the biggest future hurdle, even the documentation needed for registration carries substantial costs, especially for a small company. Something seemingly as simple as who qualifies as a domestic manufacturer is unclear under the FDA regulations. Cigars may be rolled abroad, but what packaging changes within the United States qualify a brand as a domestic manufacturer?

That is an open question. The answer holds serious implications for the future business prospects of a company.

In the same conversation about the FDA process, attorney Frank Herrera, who represents dozens of cigar companies, gave a most lawyerly answer about whether or not you should register: “If you think you might be [required to register now], do it, list it.” In terms of maximizing the odds of complying with the FDA, Herrera is, of course, correct. For a small company operating on thin profit margins already, though, these costs could be prohibitive, or at least partially unnecessary.

Compliance with the FDA isn’t the only hurdle cigar makers and importers face. Retailers are liable if they sell a non-compliant product. This means retailers—especially large online and catalog sellers—are making buying decisions based on who appears likely (or not) to comply with all FDA regulations. Reports are already surfacing that retailers are cutting back on purchases of cigars they doubt will be on the market in two years.

So even before any deadlines pass, small cigar makers face a dilemma: Not spending money now on FDA compliance to show retailers you are likely to be on the market in two or three years means lost sales today, and those sales today may be the difference between having the funds or not to successfully pursue Substantial Equivalence in the future.

Meanwhile, with it totally unknown exactly how much a successful SE application will cost, continuing to sink money today into a process that ultimately may be cost prohibitive could itself be a fatal business decision. If a cigar maker runs the numbers and decides the volume of sales of product don’t warrant the currently unknown cost of investing in FDA approval, they risk that product being seen by retailers as a “zombie cigar” (destined to be killed off soon by the FDA).

When it comes to complying with costly regulations, larger companies with deep pockets are always better able to deal with the uncertainty. For boutique brands sold in smaller quantities, those costs represent a much higher percentage of their operating costs. As deadlines approach this year, smaller companies face impossible decisions with the fate of their businesses at stake.

–Patrick S

photo credit: Stogie Guys

The Food and Drug Administration’s cigar regulations officially took effect on Monday, August 8, a date that will likely live in infamy for the handmade cigar industry. If you follow the industry by reading sites like this one, or if you spend a lot of time in cigar shops, you probably have heard that these regulations will be very bad for premium cigars. That’s true. But the full story is complex.

For starters, the full impact of the rules will take years to see. The various components of the new rules are wide-ranging with differing impacts. Warning labels, ingredient disclosures, sample bans, advertising regulations… Each create burdens for cigar companies, most of which can be passed to consumers. (The only rule change that likely won’t have any real impact is the part of the rule that sets the minimum age for purchasing cigars at 18, since that is the law everywhere already.)

The Biggest Change: FDA Pre-Approval Requirements

By far the biggest change is in what it takes to sell a new cigar in the United States. Before the FDA rules took effect, if you wanted to sell a new cigar, the process for doing so was relatively straightforward.

Basically, if you wanted to bring a new cigar to market and you didn’t own your own cigar factory, you found someone who did and struck a deal. Work out quantities, delivery date, and terms of payment and, depending on how active a role you wanted in blending and quality control, you could have a new cigar for sale in a matter of weeks or months if you were willing to pay for it. (Of course, there are more details and paperwork left out here but, fundamentally, that’s what it took.)

With the FDA rules having gone into effect on Monday, now, before you can sell or market that new cigar in the United States, the FDA must give you its permission. (Within two years, every cigar introduced after February 2007 will have to go through the same process.)

Estimates for the cost of obtaining that permission vary widely from $20,000 to $100,000 or more. Each cigar product (including each size and each packaging option) would need its own approval, though the FDA says the cost per approval should decrease if approval requests are bundled together, presumably as in multiple new sizes of the same blend.

Ultimately, whether the higher or lower estimates prove correct will have a huge impact, with the higher the costs the larger the barrier for new cigars. But just as important, if not more important, is the cost associated with how long the process takes. The FDA told us that the agency has a goal of acting on Substantial Equivalence approval requests (which are the route most cigars are expected to use) within 90 days. That may be the stated goal, but it is one many are skeptical the FDA can achieve, especially when you consider that many of the first cigarette approval requests took years for the agency to act on.

Uncertainty is the Biggest Cost

Talking with those in the cigar industry, I don’t think it would be an understatement to say that uncertainty of how the rules will be applied is almost worse than the impact of the rules themselves. Planning an ongoing business while facing unknown but potentially devastating regulations is all but impossible.

Hypothetically, if by spending $40,000 on the first application and $5,000 on additional sizes of the same blend guaranteed approval in six months, the impact would be bad, especially for smaller companies. But at least it would be known. What is scarier for a company, especially a small business, is spending that money on an application and then potentially having the FDA reject it, or sit on it for years without taking action. This is especially true since you already paid money to have the cigar made for testing and would have to spend more money to secure tobacco to make more when the approval is granted, if it is granted at all.

It’s easy to see how this uncertainty would be paralyzing to a cigar business that already has enough challenges making cigars that appeal to fickle consumers.

Loopholes in the FDA Pre-Approval Regime

I’ve never liked the word loophole when applied to complying with government rules. It implies there is something wrong with complying with the law to the letter, even if it isn’t in the exact way the regulators intended. But whatever you call it, as with any complex law, from the moment the FDA rules were written those affected naturally started to look for ways to lessen the impact.

The most obvious way to avoid or delay the full brunt of the FDA rule was to get cigars on the market prior to August 8. The flood of new cigars this summer suggests many companies took this approach, which buys them 18 months to see what the FDA approval process looks like, and another six months after that to sell their cigars without FDA approval.

Some companies are taking this even further with what are being called “stealth cigars,” which are cigars being delivered to one or a few retailers prior to the deadline without any fanfare with the intention of announcing the “new” cigar publicly at a later date when they are ready for wider distribution and marketing. Although I haven’t seen any examples as of yet, smart companies that were selling cigars in 2007 should have seen the possibility of the grandfather date issue, and made sure that cigars that normally may have been discontinued were kept alive with a small token amount of sales just to keep their options open.

Another possible loophole would be selling limited editions and other cigars overseas where retailers there could then sell them into the United States absent FDA regulations. Since the FDA regulations only apply to cigars made in the U.S., or imported or distributed into the U.S., direct-to-consumer sales from overseas could potentially legally bypass the FDA. Currently, many shops overseas are willing to ship Cuban cigars into the United States, and although the recipient may be violating the U.S. embargo on Cuban products, there isn’t any prohibition on buying cigars for personal use that aren’t of Cuban origin.

Judging the Impact

The full impact of the FDA regime will take at least two years to judge. Because of the flood of new cigars in advance of the rule’s effective date, we are entering a long period of transition. Further, until cigar makers have an idea of how much the approval process will cost and how long it will take, it will be too soon to know how they will react.

Any prediction made now is purely speculative, and absent enactment of the Traditional Cigar Manufacturing Preservation Act, the best we can do now is hope for the best and prepare for the worst.

–Patrick S

photo credits: Stogie Guys

Food and Drug Administration (FDA) regulations covering the cigar industry don’t take effect until August, but the impact on cigars is already apparent. The regulations, which have already prompted two lawsuits against the agency (a long-planned lawsuit by the CRA, IPCPR, and CAA was filed last week), threaten to stifle the introduction of new cigars, plus the continued sale of any cigar introduced after February 15, 2007.

With the annual IPCPR Trade Show set to start next week, cigar makers are already announcing new cigars at a record pace, with plenty more expected next week. The reason is clear, as cigars introduced after August 8 will have to wait for FDA pre-approval before being marketed or sold in the United States, while those on the market before that date can be sold for two years without needing pre-approval.

Exact details of the pre-approval process are still unknown, which only fuels the urgency of getting new products to market. Most industry sources hope cigars will be approved as “substantially equivalent” to a product on the market prior to the February 2007 date, but even that standard may be difficult and costly to establish.

According to the FDA’s final rule, the agency estimates it will take 300 hours for each Substantial Equivalence (SE) report, which works out to two months of time for one full-time employee. Industry sources believe the cost of each SE report would likely be even greater than the FDA’s estimate, possibly $100,000 or more.

Those estimates are per SE report, and the FDA requires pre-approval for every tobacco product. This would likely include every new cigar size and packaging combination. For example, if a cigar is sold in 10-count and 20-count boxes, each would need a separate approval. Presumably, so would samplers created by the manufacturer, and potentially even samplers created and sold by retailers.

Needless to say, those costs are prohibitive for small cigar brands for whom a large volume vitola may only sell tens of thousands of units in a year. By introducing lines now ahead of the August 8 deadline, those small manufacturers buy themselves 18 months before they have to decide whether to submit them to the FDA for approval.

By then, cigar makers will have a better picture of the costs and requirements of achieving FDA approval, so they can decide if seeking approval makes economic sense, or if they will be forced to withdraw cigars from the market by August 2018 (after which cigars introduced after February 2007 can no longer be sold unless they have begun seeking FDA approval).

Unfortunately, this means many of the new cigars being rushed out before the deadline are living on borrowed time. While the results of the lawsuits could change the FDA regulations, such lawsuits are always difficult to win. In the meantime, while there will be a lot of excitement over the next two weeks as numerous cigars are announced, the devastating effects of FDA regulation on the handmade cigar market are already showing.

–Patrick S

photo credit: Stogie Guys

[Below is a follow-up to a previous commentary on the grim FDA situation facing the cigar industry.]

The U.S. Food and Drug Administration’s cigar regulations will undoubtedly transform the industry, leading to the potential elimination of most sticks introduced after Feb. 15, 2007.

Obviously, that includes a lot great cigars. It also strikes at the heart of what many consumers enjoy about the pastime: discovering new and different cigars.

What it doesn’t have to mean, though, is an end to cigar smoking pleasure. In the words of Buddhist teacher Tara Brach, “A truly happy person is one who can enjoy the scenery on a detour.”

And that’s what we face—a major detour. It’ll require a lot of shifts in the way we think about and approach cigars.

For many, cigar smoking has become subject to the common consumer quest for something new. Indeed, “What’s new?” has got to be the most common question asked by customers at a tobacconist.

Scientists know that humans respond to novelty, and that novelty wears off over time. As professor Aimee Huff, who’s studied the issue, wrote: “the perception of newness is an important part of the consumption experience because it creates short-term value.”

Achieving that experience won’t be nearly as easy if all the FDA restrictions take effect as scheduled. That means we’ll have to adjust our approach.

For starters, instead of asking the clerk, “What’s new?” I suggest asking yourself, “What’s new for me?” There are likely to be hundreds of pre-2007 cigars you or I haven’t tried. Sure, maybe we don’t want to try half of them, but that still leaves a lot to check out.

Another approach is to thoroughly examine what it is about certain cigars that you enjoy most and look for others that match or come close. Some of them could be pre-2007 cigars, some may be among those that make it through the vetting process.

Thinking carefully about what you enjoy may also make it easier to find satisfaction with a smaller number of lines.

A return to the days when most cigar smokers stopped by their local shop periodically for the same box of, say, Romeo y Julieta or Montecristo, seems highly improbable, regardless of what happens. But continuing to sample a new release every week or so seems an equally remote possibility.

I, for one, intend to go on smoking and enjoying cigars, regardless of the obstacles. If I have to make an attitude adjustment in order to do it, I’ll make the effort.

–George E

photo credit: Stogie Guys