UPDATE 5-Lorillard shares rise as menthol ban seen unlikely

Fri Mar 18, 2011 4:39pm EDT

* Lorillard shares end 11 pct higher as ban seen unlikely

* FDA will consider findings

* Agency to give initial response in about 90 days (Revises first sentence, adds analyst comments, Lorillard comments, adds closing stock prices, adds NEW YORK to dateline)

By Lisa Richwine and Phil Wahba

SILVER SPRING, Md./NEW YORK, March 18 (Reuters) - The worst fears were lifted for Newport maker Lorillard Inc (LO.N) on Friday as a report said more research was needed as the U.S. government considers whether to ban menthol cigarettes.

While long-awaited findings prepared for the U.S. Food and Drug Administration said that banning menthol cigarettes would improve public health, tobacco industry analysts said they ultimately expect menthol cigarettes to remain on the market.

Shares of Lorillard, whose Newport brand is the best-selling menthol cigarette, ended 10.6 percent higher at $87.11 on the New York Stock Exchange on Friday. Meanwhile, options traders took a defensive stance in the company. [ID:nN1838915]

"One of the key reasons (shares rose) is that it lifted uncertainty on the stock," said Davenport & Company analyst Ann Gurkin who raised her rating on the shares to "buy" from "hold." "The uncertainty as to what the committee would recommend has been laying on the stock, and now we know the recommendation."

In the draft report, an advisory panel said "removal of menthol cigarettes from the marketplace would benefit public health in the United States."

The advisers acknowledged, however, that illegal sales could occur if menthol cigarettes were banned and said the FDA should consult experts on that topic. The advisers also called for more study of marketing practices and other issues.

The priority given to the research recommendations may depend on what action the FDA takes, the report said.

The committee will send the final report, with only minor changes expected, to the FDA by Wednesday. The FDA will consider the advisers' views as it decides whether to ban or otherwise limit menthol, or mint-flavored, cigarettes. The FDA does not have to follow the advice or take any action on the report.

"It's very unlikely the FDA will end up banning menthol cigarettes based on the recommendation we got this morning," said Mark McMinimy, an analyst who follows the sector for MF Global Holdings Ltd's MF.N Washington Research Group.

"If you're calling for more research, how can you call for something like removing menthol cigarettes from the market, which seems very final?"

Dr. Lawrence Deyton, head of the FDA's tobacco center, said the agency would review the findings and provide an initial progress report in about 90 days.

The FDA could take some time to make a decision and ultimately may not make one, Gurkin and others said.

LORILLARD NOT SURPRISED BY REPORT

UBS analyst Nik Modi added Lorillard to the UBS Alpha Preferences most-preferred list. Concerns about a black market and the potential loss of billions of dollars in tax revenue would work against an FDA ban, Modi said in a research note.

Health advocates argue menthol flavoring masks the harshness of tobacco, making it easier to start smoking and harder to quit. Manufacturers say adding menthol does not make a cigarette more harmful or addictive.

The FDA advisers, experts from outside the agency, concluded the availability of menthol cigarettes "increases initiation and reduces cessation," the report said.

"Of particular concern was the high rate of menthol cigarette smoking among youth and the trend over the last decade of increasing menthol cigarette smoking among 12 to 17 year olds, even as smoking of non-menthol cigarettes declines," the report said.

The issue is racially sensitive as blacks overwhelmingly favor menthol and suffer more from smoking-related illnesses and deaths than whites.

Reynolds American Inc's (RAI.N) R.J. Reynolds Tobacco Co and Altria Group Inc's (MO.N) Philip Morris also sell menthol cigarettes. Menthols account for nearly one-third of the $83 billion in annual U.S. cigarette sales, according to Euromonitor International data.

The Newport brand accounts for about 85 percent of Lorillard's cigarette sales, including a non-menthol version that the company launched in the fourth quarter of 2010. Any curbs would be a severe blow to Lorillard, which objected to the panel's findings.

"While we fundamentally disagree, we are not surprised by what we believe is (an) unsubstantiated conclusion relative to the impact of menthol cigarettes on public health," Lorillard Chief Executive Murray Kessler said in a statement.

Lorillard expects that menthol cigarettes will ultimately not be removed from the market, "especially when contraband and other unintended consequences are seriously considered."

Lorillard has filed a lawsuit to prevent the FDA from considering the panel's report in making any final decision on menthol cigarettes. [ID:nN25138916]

A 2009 law banned chocolate, cherry, vanilla and other cigarette flavors, but exempted menthol. Instead, Congress called on the FDA and its advisers to examine the issue.

Altria shares gained 1.5 percent to end at $24.80 and Reynolds shares rose 1.9 percent to $33.47, both on the NYSE. (Reporting by Lisa Richwine, additional reporting by Jessica Wohl in Chicago and Phil Wahba in New York; Editing by Gerald E. McCormick and Steve Orlofsky)

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