Wednesday, July 13, 2016

FDA Botched Cost-Benefit Analysis of Its E-Cigarette Deeming Regulations

After reviewing the declaration of Nicopure Labs'  CEO Jeff Stamler in its lawsuit against the FDA, I have concluded that the FDA completely botched its cost-benefit analysis of the e-cigarette deeming regulations, drastically underestimating the costs of the regulations and without even attempting to quantify the benefits.

As such, this represents a violation of the Administrative Procedures Act, providing strong grounds for the D.C. District Court to overturn the regulations.

In its declaration, Nicopure reveals that it has 2,400 stock keeping units (SKUs), including e-liquids, vaporizers, and component parts. This means that in order to keep its products on the market, Nicopure will have two years to complete 2,400 pre-market tobacco applications (PMTAs), each of which is estimated by the FDA itself to cost approximately $300,000 and to require 1,500 hours to complete.

Nicopure estimates the actual cost of each PMTA to be between $3 million and $5 million. But even if we use FDA's more conservative estimate, it would cost Nicopure $720,000,000 ($720 million) to keep its products on the market. The company estimates that at very best, it could complete PMTAs for 12 of its products. Thus, the regulations - if not overturned - will decimate the overwhelming majority of Nicopure's offerings to vapers.

The Rest of the Story

The FDA estimated that it would receive only 750 PMTAs. So one of two things must have occurred:

1. The FDA grossly underestimated the number of regulated products on the market.

While the FDA apparently thought there were only 750 products, we now know that one company alone manufactures 2,400 different products. With hundreds of companies out there, it seems clear that the agency didn't even come close to providing an accurate estimate of the number of PMTAs that would be required under its regulations.

2. The FDA assumed that most companies would go out of business and therefore not submit any PMTAs.

A second possibility is that the FDA did have an accurate idea of the number of companies and products on the market, but assumed that the overwhelming majority of these companies would not bother to submit PMTAs because of the prohibitive expense and would therefore go out of business.

In both cases, the FDA would have botched its cost-benefit analysis.

In case #1, the agency grossly underestimated the costs of the regulations because it failed to even come close to an accurate estimate of the number of affected companies and products.

In case #2, the agency grossly underestimated the costs of the regulations because it failed to account for the economic costs associated with hundreds of small companies going out of business.

Either way, it seems clear that the FDA failed to conduct a proper cost-benefit analysis and therefore violated the Administrative Procedure Act, providing strong grounds for the D.C. District Court to overturn the deeming regulations.

Note that this is only one of many grounds upon which the deeming regulations have been challenged. I outlined some of the other grounds elsewhere.

Making the violation even worse is the fact that by its own admission, the FDA failed to quantify the expected benefits of the regulations. The agency could not document that e-cigarettes are currently causing substantial health harm that would be negated by its promulgation of these regulations.

After speaking with many vape shop owners and e-cigarette and e-liquid manufacturers in the weeks since the deeming regulations were released, it seems clear to me that the overwhelming majority of e-cigarette businesses are unable to afford the expense of completing any PMTAs. It is simply too expensive and these small businesses do not have the kind of capital on hand that would be required. As a result, many of these companies are resolved to do business for another two years and then drop out of the market. Others are deciding to drop the majority of their products and just focus on perhaps one or two flavorings.

There is no question that the combined effect of the regulations will be to decimate the vaping product market, both by forcing hundreds of small and medium companies out of business and by removing the overwhelming majority of vaping products and flavorings from the market.

The impact will be not only the severe economic losses to small and medium businesses, but also the damage done to the public's health by helping cigarettes restrain what otherwise would have been serious competition from safer alternative products. The deeming regulations are therefore a godsend to the tobacco cigarette market. It is brutally ironic that an agency entrusted with protecting the public's health has taken an action that will promote cigarette sales and protect cigarette profits.

No comments: