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Menthol Cigarette Debate Could Impact Lorillard
By Matthew Perrone, AP Business Writer
Manufacturing.Net - July 23, 2008

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WASHINGTON (AP) -- Executives from cigarette maker Lorillard will keep a close eye on Capitol Hill next week as lawmakers consider measures that could threaten sales of its lucrative menthol-flavored brand, Newport.

The House of Representatives could vote before month's end on a bill giving the Food and Drug Administration power to regulate tobacco. If signed into law, the government would gain new power to restrict ingredients used in cigarettes and crack down on advertising directed at children. Currently, additives found in cigarettes, chew and other tobacco products are not regulated by the government.

Despite wide support for the effort in Congress, debate over whether and how to restrict use of menthol flavoring is threatening to derail the bill. No company has more at stake in the outcome than Greensboro, N.C.-based Lorillard, which relies on menthol cigarettes for 90 percent of its sales.

The current bill exempts menthol from an immediate ban applied to other tobacco-masking flavors used in cigarettes, such as orange, strawberry and cherry. Instead the bill gives regulators power to ban or limit menthol at a later date, if they can show scientific evidence it threatens public health.

The wording of the menthol provision is a point of contention among bill supporters in the House. While some members of the Congressional Black Caucus have pushed for an outright ban on menthol, others say such strong language would threaten the bill's chances of becoming law.

"This has been something long sought after and now that we finally have it within our grasp we shouldn't undermine it," said Virgin Islands Delegate Donna Christensen. Pursuing an outright ban would "threaten a very fragile agreement," she added.

Some Republicans, including Sen. Richard Burr of North Carolina, have already vowed to block the bill if it reaches the Senate.

Menthol cigarettes make up more than a quarter of the total U.S. market. About 70 percent of black smokers buy menthol cigarettes, compared with about 30 percent of white smokers.

Supporters of a menthol ban say the flavoring makes smoking more tolerable to youngsters and functions as a starter product. However, industry advocates dispute the claim.

Lorillard said its products should not be compared to fruit-flavored cigarettes, a recent development which lawmakers accuse of blatantly encouraging children to smoke.

"Menthol has been used in cigarettes for 82 years," said company spokesman Michael Robinson. "It has never been used to attract younger smokers."

The company's best-selling Newport brand accounts for one-third of the U.S. market for menthol cigarettes. The other leading menthol brands are Kool and Salem cigarettes, both made by Winston-Salem-based Reynolds American Inc. The two brands combined still account for less of the market than Newport.

A report from Harvard University researchers last week pointed to industry records that showed companies adjusted menthol levels to target different age groups. For instance, Philip Morris used low-menthol cigarettes to introduce their brand to younger smokers, but raised menthol levels in brands aimed at older smokers.

Lorillard said it does not alter menthol levels to hook smokers, and has not adjusted Newport's formulation since 2000.

The company spent more than $750,000 in the first quarter lobbying the federal government on cigarette regulation, including the menthol debate, according to government filings.

Competitor Philip Morris, which markets Marlboro cigarettes, actually favors the bill and is credited with helping build support for tobacco regulation in Congress. The company sells menthol cigarettes under the brand Marlboro Milds, but they are a small segment of its revenue.

Analysts speculate the Richmond, Va.-based company supports the effort because it is better positioned than rivals to operate in a more-regulated environment. Because of its size, the company could dedicate more resources to dealing with regulators than its smaller competitors.

Altria Group Inc., Philip Morris' parent company, already controls more than 40 percent of the U.S. cigarette market.

But despite support for the bill in both chambers of Congress, complicating issues appear to be stalling its momentum.

The Bush administration said Tuesday it opposes giving FDA oversight of tobacco because it would suggest cigarettes are somehow safe. Opposition from the White House could doom the bill's chances of passing this year, since its supporters do not appear to have the Senate votes needed to overturn a presidential veto.

Additionally, Congress is approaching its summer recess and still has more pressing legislation to pass, including a housing bill aimed at propping up the economy.

But the threat of tobacco regulation is not necessarily going away, according to Deutsche Bank analyst Marc Greenberg.

With the potential for Democrats to win the White House and increase their majority in Congress this November, Greenberg writes that party leaders seem "inclined to wait on major issues until it has a stronger hand to play."

He said the prospect of tobacco regulation being delayed until 2009 would benefit Lorillard shares in the near term.


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