Profits for major U.S. tobacco companies could be cut in half if the Food and Drug Administration adopts a "maximum nicotine" rule within the next 15 years, according to analysts at Morgan Stanley.

The FDA is set to publish in October its proposed rule regulating the amount of nicotine allowed in cigarettes and other tobacco products "so that they are minimally addictive," according to the agency. The rule, if adopted, "would have significant public health benefits" and "potentially vast economic benefits," the FDA said.

The regulation, if adopted by 2035, would also cost the industry roughly $165 billion in lost profits, Morgan Stanley analysts wrote in a research report Sunday.

"Reducing nicotine in cigarettes to non-addictive or minimally addictive levels, in our view, would be a potential game changer for the U.S. industry," the analysts wrote. Morgan Stanley has rated the stock of Imperial Brands and Marlboro-maker Altria as underweight, which is effective a sell recommendation, and downgraded British American Tobacco to underweight.

If the policy goes in effect by 2035, though, Morgan Stanley predicts tobacco stocks will take a huge hit, while e-cigarette giant Juul will benefit as consumers transition from smoking to vaping. This is even more bad news for Big Tobacco, which has struggled with falling sales in recent years in the face of new competition and changing consumer habits.

The proposed rule change would be bad news for investors, shaving an estimated 20% off of Altria's market value, 13% off British American Tobacco and 5% off Imperial Brands if the FDA implements it in 2035.

Those numbers are even more grim if the regulations are implemented a decade earlier. Altria's market cap is projected to fall by 37%, while British American Tobacco and Imperial Brands would see their market values fall by 32% and 15%, respectively.

Morgan Stanley predicts the number of adult smokers in the U.S. to fall from 34 million, about 13.2%, in 2018 to 14 million by 2030, or 5%, to less than 1% of the adult population by 2050, even without the proposed nicotine regulation. The bank said it expects a pack of cigarettes to cost a smoker about $16 by 2035.

If the FDA regulates nicotine levels in cigarettes, the firm believes smoking will decline to zero.

"We don't believe a smoker will continue to purchase nonaddictive cigarettes, particularly with the presence of alternative nicotine delivery devices," the analysts wrote.

Marlboro-maker Altria has the most at risk if the FDA enacts the maximum nicotine policy, the analysts said. However, they added the company is "best placed" to transition to a focus on alternative nicotine products because of its 35% stake in vaping company Juul and the company's agreement with Phillip Morris to sell PMI's heated tobacco product, iQOS, in the U.S.

The analysts said British American Tobacco "has a difficult path forward in the U.S." because of its "sub-tier" e-cigarette and heated tobacco products. BAT only holds 10% of the e-cigarette market compared with Juul's 70% market share, according to Morgan Stanley. They also said the company's heated tobacco product, the Eclipse, has been less successful than iQOS.

Morgan Stanley said it's maintaining an underweight rating on Imperial Brands' stock because 23% if its profits are U.S. cigarettes sales and it has a relatively weak portfolio of brands.

Tobacco stocks from mid-2017 to early 2019 fell by about 40% because of Juul's meteoric growth in market share, potential menthol regulation and a drop in cigarette sales, according to Morgan Stanley.

The analysts said they don't believe the risk from the maximum nicotine proposal is fully reflected in the stock prices and that the threat the policy poses will likely be an ongoing headache.