* 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
By Lisa Richwine and Phil Wahba
SILVER SPRING, Md./NEW YORK, March 18 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.
"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
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
"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)