FDA Mulls Ban on Newports, Menthol Cigarettes

(Potential menthol cigarette ban report updated with response from Altria Group (MO).)
GREENSBORO, N.C. (TheStreet) -- Lorillard (LO), Reynolds American (RAI) and Altria Group (MO) have been on the rise in recent sessions after a Food and Drug Administration panel did not specifically suggest the agency should ban menthol cigarettes.

The Tobacco Products Scientific Advisory Committee, the FDA panel, did say on March 18 that the removal of menthol cigarettes from the American cigarette market would improve the overall health of the nation, but did not go as far as to suggest a complete ban of the flavored smokes. "The availability of menthol cigarettes has adverse impact on public health by increasing the numbers of smokers," the panel said, adding that it "has no specific suggestions" on how to proceed based on its assertions.

The 2009 Family Smoking Prevention and Tobacco Control Act stipulated that tobacco makers could not add candy-like flavors such as cloves and vanilla to their products, but left the menthol debate up to the FDA.

An "undue emphasis on reduction of menthol relative to other cigarettes may distract from the ultimate health-prevention message that smoking of any cigarettes is injurious to health," the panel said.

A report from the panel is expected to be delivered to the FDA any day now, though the FDA has no deadline to make a decision about a ban on menthols.

Altria Client Services on behalf of Philip Morris USA sent a written report to the FDA summarizing its response to the panel's findings.

The Philip Morris report found that its "review of the science- and evidence-based information demonstrates that regulatory actions or restrictions related to the use of menthol in cigarettes are neither necessary nor justified."

"Significant restrictions, like eliminating menthol in cigarettes, would not reduce the population harm caused by cigarette smoking, and would lead to severe and lasting unintended consequences detrimental to public health objectives and society."

The response letter concluded that the FDA should use existing provisions "to undertake an overall approach to reducing the harm from cigarette smoking," adding that "Sound public policy warrants that FDA give these provisions an opportunity to achieve their intended purposes before proposing further or supplemental -- and possibly countervailing -- steps."

Menthol smokes make up about 30% of all the $70 billion U.S. cigarette market, the Wall Street Journal, reported, and are favored by younger smokers and black people.

The scientific advisory panel to the FDA, made up of scientists, physicians, and public health experts, noted that menthol cigarette smoking among adolescents is on the rise, and is "very high" particularly among minority youth. The panel also suggested that adolescents who try menthol, or mint-flavored, cigarettes are more likely to become full-time smokers, and that the menthol flavor of the cigarettes inhibits quitting among certain groups of people.

Researchers at Vanderbilt University were not so sure. They found that menthol cigarettes may actually pose a lower risk for lung cancer than traditional, non-flavored smokes.

The seven-year study of nearly 86,000 adults in 12 southern states, published Wednesday in Journal of the National Cancer Institute, found that menthol smokers who consume at least 20 cigarettes per day were 12 times more likely to get lung cancer than nonsmokers, while among nonmenthol users who smoked the same amount, the chances of getting lung cancer were 21 times more likely than among nonsmokers.

The study, funded by the U.S. National Cancer Institute, noted that it is no more difficult to quit smoking menthols than nonmenthols.

The Vanderbilt University study also found that menthol smokers consumer fewer cigarettes each day than nonmenthol smokers. Researchers found that 86% of blacks and 23% of whites in the study smoked menthol cigarettes. Blacks who used menthols smoked 1.6% fewer cigarettes per day, on average, than blacks who smoked nonmenthols; white menthol users smoked an average of 1.8% fewer cigarettes per day than white nonmenthol smokers.

"These findings should inform any decision-making process by the Food and Drug Administration to single out menthol cigarettes as uniquely more harmful than nonmenthol cigarettes," urged the authors of the study, led by Rockville, MD-based International Epidemiology Institute's William Blot, PhD.

The FDA panel found that advertising of menthol brands was prominent in African-American communities.

And while blacks smoke fewer cigarettes than whites, the group suffers from higher rates of lung cancer, stroke and other tobacco-related diseases.

An earlier draft of the report asserted that 80% of African-American adolescent smokers and more than half of Hispanic smokers between the ages 12 and 17 opt for menthol cigarettes over non-menthols.

Thousands of deaths of each year could be avoided by removing menthol cigarettes from the market, the FDA's advisory panel said. Around 443,000 American deaths each year are caused by tobacco-related disease, costing $100 billion for medical care and another $100 billion in lost productivity.

For Lorillard, the hotly contested debate hits close to home. It makes the most popular menthol cigarette brand, Newport, a cigarette which accounts for 90% of its total revenue.

Menthol cigarettes are also made by Altria Group and Reynolds American but comprise significantly smaller percentages of the companies' sales.

Lorillard shares are up around 16% since the FDA advisory panel first published its report on March 18.

Altria Group is up around 5% since then and Reynolds American has gained around 4%.

That the FDA made no clear recommendation to ban menthol cigarettes "is a better outcome than what the market was fearing," said Morgan Stanley analyst David Adelman. "What the panel has done is to take a very hard line on menthol, to highlight concerns to the FDA, but not to recommend any particular action or policy," he added. "I remain of the view that it's unlikely that the FDA will ban menthol."

Moody's Investors Service agreed with sentiment but purported that the industry could work through such an obstacle if it were to come to fruition.

The cigarette industry could "absorb a revenue hit from a menthol ban," said Janice Hofferber, senior credit officer at Moody's.

The credit-ratings firm estimated that, if a menthol ban were to be enacted, cigarette sales volumes would fall between 8% and 10% within a year, and between 3% and 4% on a longer-term basis.

Morningstar analysts noted that its "thesis that the FDA will not ban menthol remains intact, and we continue to expect a much more benign outcome, such as marketing restrictions."

"We think a menthol ban is unlikely because if a black market were to emerge, the FDA would lose the ability to regulate the category," the firm noted. "In addition, with menthol accounting for almost one third of the U.S. cigarette market, government revenue would be significantly affected."

Morningstar maintained its fair value estimates for U.S. domestic tobacco makers, including Lorillard.

Total cigarette sales have been declining for over 10 years, according to IBISWorld, and menthol cigarette sales have also been on the decline.

The research firm reported that, in the U.S., 423 billion cigarettes were sold in the year 2000, 110 billion, or 26% of which, were of the menthol variety.

By 2005 just 371 billion cigarettes sold in the U.S., 105 billion, or 28.3%, of which were menthols.

In 2011 total U.S. cigarette sales fell to 348 billion. Of that figure, 92.9 billion, or 26.7%, were menthols.

Likewise, teen smoking has also been waning in recent years. The Centers for Disease Control and Prevention reported that in 2009 19.5% of high school students said they had smoked a cigarette within the previous month, compared with 34.8% in 1999.

Of the adult population in the U.S., around 21% are smokers.

An FDA-imposed menthol ban could be the precursor to a more general move toward restricting the amount of nicotine permitted in cigarettes, "and that's what the industry is really afraid of," Robert Proctor, a professor of the history of science at Stanford University, who has testified as an expert witness in litigation against tobacco firms, told the Chicago Tribune.

Maverick and True cigarettes maker Lorillard beat expectations as it sold more cigarettes at higher prices last quarter. Rival cigarette makers Reynolds American and Altria Group each reported slower cigarette sales in the recent quarter.

Reynolds American brands include Pall Mall, Camel, Winston and Kool, along with a number of smokeless tobacco products through its Conwood subsidiary. Altria makes makes Chesterfield, L&M, Marlboro and Parliament brands of cigarettes for U.S. consumers.

Lorillard booked a 7% increase in profits to $259 million, or $1.74 per share. Revenue rose 7.9% to $1.49 billion as its total retail market share for 2010 reached an all-time high of 12.9%.

Cigarette volume grew 4.5% in the quarter to 9.46 billion cigarettes. Newport brand sales increased 2.2% while sales of Lorillard's lower-priced brands such as Maverick spiked 25.2%. Newport's shares of the menthol market grew half a point to 35.3%; the brand also introduced a non-menthol version in the recent quarter, contributing to overall Newport sales.

Lorillard's Maverick and Reynolds American's Pall Mall cigarettes -- each among the lower-priced tier of cigarette brands -- benefited as cash-strapped consumers traded down to less expensive smokes to save money.

Philip Morris International ( PM) grew its quarterly profit by 15% thanks to strong demand for its cigarettes in Asia.

The maker of Parliament, Virginia Slims, L&M and Chesterfield cigarettes, among other brands, said Marlboro demand also drove results last quarter.

Philip Morris International only sells cigarettes outside the U.S.; Philip Morris USA is a wholly owned subsidiary of Altria Group.

-- Written by Miriam Marcus Reimer in New York.

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