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Skycig appoints CFO

| December 5, 2013

Skycig, the Scottish e-cigarette company that was acquired by Lorillard in October, has appointed Bruce Casely as its chief financial officer. Casely is the former finance chief of U.S. online advertising firm Digital Globe Services.

Skycig’s president and co-founder Tom Rolfe said Casely will help the company integrate smoothly into a global corporation with complex financial reporting requirements, adding that his international experience would also support potential European expansion.

Casely has held executive and managerial positions at Bank of Scotland, Ernst & Young, Rothschild and Scottish & Newcastle.

Lorillard’s 1Q profit up 47 pct on higher pricing, e-cig sales, lower costs

| April 25, 2013

Lorillard’s first-quarter profit jumped 47 percent as higher prices, e-cigarette sales and lower legal expenses from a longstanding legal settlement offset a decline in traditional cigarette sales.

The nation’s third-biggest tobacco company on Wednesday reported earnings of $328 million, or 86 cents per share, for the period ended March 31, up from $223 million, or 57 cents per share, a year ago, according to the Associated Press.

Excluding one-time items, earnings were 66 cents per share, beating Wall Street expectations by 2 cents. That excludes a benefit of 23 cents per share in credits for disputed payments under the 1998 Master Settlement Agreement, in which some cigarette makers are paying states for smoking-related health care costs.

Revenue excluding excises taxes rose 6 percent to $1.12 billion, matching analyst expectations, according to FactSet.

Its shares rose $1.29, or about 3 percent, to $43.07 in morning trading.

Supreme Court declines to hear cigarette label case

| April 22, 2013

The legality of placing graphic warnings on cigarette packages appears to have been settled when the U.S. Supreme Court declined today to hear an appeal on the labels from a group of tobacco manufacturers, according to a story in the Winston-Salem Journal.

However, it remains unclear what the warning labels will look like or when they will debut.

A federal appeals court in Cincinnati ruled in March 2012 to uphold parts of the 2009 Family Smoking Prevention and Tobacco Control Act, which restricts how tobacco products may be marketed. The FDA’s labels would cover the top half of cigarette packs.

The manufacturers, including R.J. Reynolds Tobacco Co. and Lorillard Inc., petitioned the U.S. Supreme Court in October to review that case. Reynolds did not have immediate comment today on the decision.

The nine labels – which include images of dead bodies, diseased lungs and gums, and cigarette smoke drifting around an infant — were chosen by the FDA in June 2011. The labels had been slated to debut last September.

Where there’s smoke, there’s still profit

| April 22, 2013

When the three major U.S. tobacco companies report their first-quarter results this week, investors can find comfort in two themes that have remained consistent for years: Cigarette volumes will fall, but profits will rise, according to a story in The Wall Street Journal.

For the past three years, cigarette volumes have dropped around 3 percent to 4 percent annually, and analysts who follow the sector expect that trend to continue as more Americans quit smoking. But market leader Altria Group Inc. and smaller rivals Reynolds American Inc. and Lorillard Inc. keep posting higher core profits.

Analysts expect both trends will continue as all three companies are projected to report modestly higher earnings for the first quarter, though volume could decline more steeply than historical trends, due to higher payroll taxes and still-high unemployment.

The tobacco industry’s ability to consistently raise list prices and aggressively buy back shares have been the greatest drivers to their profitability gains. Smokeless tobacco products, including snuff and snus, have seen higher demand to help offset declining demand for traditional cigarettes. Lorillard and Reynolds are also in the early stages of selling e-cigarettes, which both have said offer potential for long-term growth. Battery-powered e-cigarettes turn heated nicotine-laced liquid into a vapor mist, and come in several flavors.

Critical condition

| March 1, 2011

The future of U.S. tobacco manufacturer Lorillard hangs in the balance while the government decides whether to ban menthol.

 

By Brandy Brinson

 

This month is critical to the future of Lorillard Inc., the third-largest manufacturer of cigarettes in the United States. On March 23, the Tobacco Products Scientific Advisory Committee (TPSAC) is scheduled to announce its recommendation on the use of menthol in cigarettes to the U.S. Food and Drug Administration (FDA). If the committee advises an all-out ban on menthol and the FDA follows the recommendation, Lorillard will face a huge challenge. Its top brand Newport, a premium menthol brand, accounts for more than 90 percent of total company sales.

Proponents of a ban say menthol is attractive to African-American smokers as well as minors. Opponents say a ban would result in the loss of thousands of jobs as well as create a massive black market for menthol products. The TPSAC has been reviewing the issue for more than a year.

 

The debate

The legislation granting the FDA the authority to regulate tobacco banned all flavorings except for menthol in September 2009, in the name of protecting minors from smoking. Menthol was tabled for further study, which is being conducted by the TPSAC. The legislation said the FDA should review the issue and decide by 2012 whether it should be banned.

Menthol accounts for 29 percent of all cigarette sales in the U.S. It was first added to cigarettes in the 1920s and became a marketing priority for the industry in the 1960s.

Anti-tobacco activists want menthol banned because they say young smokers begin smoking with menthol because of the minty taste. Part of the debate surrounding menthol is race-related, as approximately 80 percent of African-American smokers choose menthol cigarettes.

 

Sound science

Throughout the process, the TPSAC has stated that it will apply fact-based science to its decision-making process. The committee is examining several factors—such as whether menthol affects nicotine absorption, addictiveness, smoking initiation, perception of risk, desire to quit and conversion from experimentation to regular smoking.

Manufacturers, having submitted hundreds to thousands of pages of research, have shown that menthol does not make a cigarette more harmful or addictive.

The industry has also demonstrated grave concern for the development of a substantial black market if menthol is banned. Approximately 70 percent of menthol could turn into contraband if banned, which would equate to 20 percent of total U.S. market volume.

Lorillard presented findings of a study examining the effects of a ban to the TPSAC. The study found that an ensuing black market would substantially mitigate any decline in cigarette smoking and inspire a “significant increase in organized crime activity,” potentially increasing youth access to cigarettes. The study was conducted by Compass Lexecon, a Chicago-based economic consulting firm.

Lorillard urged the panel to not lose sight of the congressional and FDA mandate to “follow the science” in developing its report, and to keep in mind that “Congress’ purpose of granting FDA with authority to regulate tobacco was to create order and supervision of the industry—not create chaos the likes of which have not been seen since prohibition.”

Unfortunately for Lorillard, the committee appears to be downplaying concerns about a black market and lost revenue.

At this point, TPSAC appears to be focusing mainly on the issue of youth smoking.

 

Latest developments

Analysts for Deutsche Bank Andrew Kieley and Marc Greenberg predict that the probability of the TPSAC recommending a ban (or severe restrictions) in late March is slightly over 50/50.

While the evidence actually points in favor of not banning menthol for epidemiological reasons, they fear that youth smoking concerns and the negative tone of the committee will lead to a recommended ban.

“TPSAC emphasizes an evidence-based report, and significant portions of data do not support restricting menthol. However the reasons we remain concerned are youth over-indexing to menthol, and its masking effect. TPSAC is highly-attuned to the youth issue, and it would be the most likely grounds for ‘weight of the evidence’ to support a ban or other penalties,” say Kieley and Greenberg.

Just after the February TPSAC meetings, Kieley and Greenberg said, “It is frustrating that TPSAC is still not discussing recommendations, to give us some visibility. However we view discussions of draft report chapters and Committee’s tone as negative overall.”

Actions and remarks by the committee especially during the February meetings indicate that they will recommend a ban. Kieley and Greenberg say, “The negative stance of some TPSAC members is obvious; they continue to hypothesize about potential ramifications of a ban (including a large section of the Summary chapter), and their statistical model will explicitly consider a world without menthol (‘For the purposes of the present report, TPSAC is concerned with counterfactual scenarios in which menthol cigarettes never existed.’). These are not encouraging signs.”

The tone of the committee is not much of a surprise, given that members of the TPSAC have been criticized for having a conflict of interest. Two of the members have clear ties to pharmaceutical companies that manufacture smoking cessation products, with one member (Jack Henningfield) being one of eight patent holders of a nicotine chewing gum.

During the last meeting in February, Henningfield made his position even more clear when he told Philip Morris at the end of a Q&A on a long presentation, “I don’t know why you bothered.”

 

The report

While the final recommendation is still unclear, the TPSAC did announce in February its expected format for the report. It will consist of eight chapters, though the titles have not been finalized.

The chapters are:

* Chapter 1: Introduction

* Chapter 2: Approach to Evidence Gathering and Review

* Chapter 3: Physiological Effects of Menthol

* Chapter 4: Patterns of Menthol Cigarette Smoking in the U.S.

* Chapter 5: Marketing, Initiation, Addiction, and Cessation

* Chapter 6: Effects of Menthol on Disease Risks of Smoking, Toxicology, Biomarkers, and Epidemiology

* Chapter 7: Public Health Impact of Menthol Cigarettes

* Chapter 8: Conclusions and Recommendation

 

In addition, the FDA has asked industry representatives who serve on the committee to develop an industry perspective document on the public health impact of menthol cigarettes that will accompany the report.

 

While much of the report had not yet been written in February, the presentations offered some insight. Kieley and Greenberg see the most risk from Chapters 3 and 4, especially as they are fed into the TPSAC’s statistical model of menthol’s “public health” impact. “If TPSAC recommends a ban or restrictions, these chapters could likely comprise the ‘weight of evidence,’” they say.

In Chapter 3, the Physiological Effects of Menthol, the writers claim that menthol’s cooling sensory perception makes it easier to smoke, and that menthol potentially interacts with nicotine to create higher cigarette “impact” and addictiveness. They do say it is unclear if menthol impacts nicotine metabolism. However, they say menthol “clearly” reduces harshness of cigarette smoke, there is “strong plausibility” that menthol increase addictiveness of cigarettes, and that it “likely” boosts the impact of low-tar cigarettes.

Kieley and Greenberg say, “This matters for the report because in terms of a ‘public health’ risk, it would portray menthol as a starter product, a ‘conversion’ product to turn experimenters into regular smokers, or keeping people smoking rather than quitting. The risk is magnified because these factors could be inputs into TPSAC’s statistical model of mortality rates and societal disease burden.”

Chapter 4, Patterns of Menthol Smoking, is also seen as a significant negative by Kieley and Greenberg, given the FDA’s mandate to consider public health impact on underage and minority groups. The chapter shows heavy reliance on unfavorable survey data, showing higher rates of menthol preference among minority groups and women, as well as increasing share of menthol among underage smokers.

Chapter 6, Risk Factors, is certainly the most favorable to the industry. “In this section covering biomarkers and disease rates, TPSAC seems to agree with industry arguments that there is a lack of evidence that menthol is any different from regular cigarettes in these aspects,” say Kieley and Greenberg.

As of the February meeting, the draft summary was not fleshed out and did not contain firm conclusions. It is expected to summarize the statistical model and explicitly address potential repercussions of a ban.

 

The FDA. The recommendations in the TPSAC’s report are nonbinding—meaning the FDA does not have to accept them. How the FDA will respond is another area of debate.

Unfortunately, say Kieley and Greenberg, it is difficult to tell. “We think it will largely come down to 1) how much they weight TSPAC’s recommendations, 2) what strength of evidence they require, and 3) how the contraband argument resonates.” They think contraband could be critical. However, with the World Health Organization (WHO) now recommending restrictions on menthol, there will be pressure on the FDA to follow suit.

An outright ban on menthol is not the only potential outcome. Other possibilities include additional regulation—such as rules on content or marketing—as well as changing product formulation, by adjusting menthol and nicotine content.

There will also be the possibility for Lorillard to challenge a ban in court. While March 23 is a critical date, the fallout will likely carry on for months if not years.