Sell-offs spurred by worries over government regulation and legislation can present good buying opportunities for investors. They can also destroy companies and reduce investors holdings to zero.
There are several companies currently facing what is potentially game-changing scrutiny by the FDA over their products; Lorillard Inc. (NYSE:LO), Monster Beverage Corp (NASDAQ:MNST) and Intuitive Surgical, Inc. (NASDAQ:ISRG).
So here is a quick overview of their situation and the trouble that could be ahead for each company.
Lorillard
Lorillard Inc. (NYSE:LO) is facing potential bankruptcy if the FDA bans the sale of menthol cigarettes. Lorillard controls about 38.3% of the US market for menthol cigarettes, which are often accused for drawing young smokers into the habit due to their minty flavor.
The safety of menthol products has been an issue that has been hanging over the industry for several years and a draft report to the FDA in 2011 recommended the removal of menthol cigarettes from the marketplace, as of yet, this has not been enacted.
That said, the FDA’s recent appointment of Mitchell Zeller as director of the FDA’s Center for Tobacco Products, has re-ignited the issue as Zeller is notorious for his aggressive stance on tobacco control and public health.
However, there has recently been a thaw in relations between the FDA and tobacco companies as Zeller indicated on his appointment that he was interested in ‘establishing an open, honest and direct dialogue with the industry and further indicated he is looking forward to working with all constituents in fulfilling public health issues.’
This should open up dialogue, hopefully establishing a decision on the menthol debate and providing clarity for Lorillard’s investors. One thing is for sure, 87% of Lorillard Inc. (NYSE:LO)’s revenue comes from the Newport menthol cigarette brand and any ruling against menthol products will annihilate all but 13% of the company’s revenue.
Lorillard Inc. (NYSE:LO)’s future is in the FDA’s hands.
Monster
Monster Energy has recently fallen foul of the FDA after the administration launched a formal investigation into the safety of added caffeine in food products, noting in particular, the effect on children and adolescents after thirteen people reportedly died in the US last year after consuming high caffeine drinks.
This investigation was launched just days after Monster filed a lawsuit in an attempt to halt San Francisco City Attorney Dennis Herrera’s investigation into Monster’s marketing tactics.
However, Monster Beverage Corp (NASDAQ:MNST) has rebuffed these allegations, accusing the authorities of singling-out the company as – ‘any child can walk into Starbucks Corporation (NASDAQ:SBUX) and buy a coffee’, which contains roughly the same amount of caffeine.
Monster Beverage Corp (NASDAQ:MNST) only manufactures drinks containing high levels of caffeine, so a ruling against the company or its products is likely to wipe out all of the company’s sales, revenue and income, leaving shareholders with nothing.
It is uncertain how the FDA will rule on this case but it would appear that other food and beverage manufacturers are also starting to get worried. Indeed, after discussions with the FDA, Wrigley has stopped production of its caffeine injected gum. Just one piece contains 40 milligrams of caffeine, roughly half a cup of coffee. Monster Beverage Corp (NASDAQ:MNST) has also re-branded its drinks as beverages rather than dietary supplements and now lists the caffeine content on the packaging.
Intuitive
Intuitive Surgical, Inc. (NASDAQ:ISRG) has suffered over rumours about an FDA investigation concerning the safety of Intuitive’s Da Vinci robotic surgery system after the government body noticed a rise in the number of complaints it received about the system.
The Da Vinci system is Intuitive Surgical, Inc. (NASDAQ:ISRG)’s only product, apart from system modifications and add-ons so if the FDA found the system un-safe, it will be the end-of-the-road for the company.
According to a report by the AP, over 500 incident complaints have been received by the FDA since the beginning of 2012. Surprisingly, these complaints have not be filed by patients but by hospitals or by Intuitive itself. In addition, while 500 complaints might seem like a significant number, it is actually 0.125% of the 400,000 surgeries performed by the device annually.
However, Intuitive released a statement shortly after the FDA investigation was announced, commenting that the rise in complaints or Medical Device Reports (MDR) was due to a change in MDR reporting practices. Intuitive Surgical, Inc. (NASDAQ:ISRG) also stated that the majority of the sudden influx of MDR’s were reports of device malfunction reports, none of which involved ‘reportable injuries or deaths’.
Despite this statement from Intuitive, there are rumours in the market that these issues could be more widespread and that accidents in robot surgeries are generally underreported. Furthermore, there are claims that the reports filed since the beginning of last year include five deaths.
The FDA investigation continues, however, if Intuitive is found to be at fault and its Da Vinci system is shut down, the company will lose its only product.
Conclusion
All three companies face potential regulation that could end their businesses but the two I am most worried about are Lorillard and Monster.
Lorillard Inc. (NYSE:LO) is not worth the risk, there are other tobacco companies around that will provide the same kind of returns that are not facing such strict regulation. In addition, Monster Beverage Corp (NASDAQ:MNST) appears overpriced when compared to larger peer The Coca-Cola Company (NYSE:KO), which offers better long term returns, diversification and is not being threatened with the possibility of crippling regulation.
Intuitive appears to be in a better position as the company’s sole aim is to manufacture machines that are improve public health and well-being, which indicates that regulators will look at the case under a more positive light, a trait neither Monster or Lorillard can claim.
So, if investors want to run gauntlet of FDA regulation, Intuitive Surgical, Inc. (NASDAQ:ISRG) could be the best bet.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical and Monster Beverage. The Motley Fool owns shares of Intuitive Surgical and Monster Beverage.
The article Three Companies That Face Show-Stopping Regulation originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
