3rd UPDATE: FDA Panel Recommends Removal Of Menthol Cigarettes

A U.S. Food and Drug Administration panel said Friday that removal of menthol-flavored cigarettes from the U.S. market would benefit the public health.

The decision, unveiled at a meeting Friday, amounts to a recommendation that the FDA consider removing menthol-flavored cigarettes from the U.S. market, although the panel stopped short of directly saying FDA should ban menthol cigarettes. The panel said it was concerned that young people who experiment with menthol cigarettes are more likely to become regular smokers than those who try regular cigarettes.

The FDA isn't required to follow the panel recommendations, but if the agency does, agency officials have said it "would take years." The tobacco product advisory panel recommendation will be part of a report on the public health impact of menthol the panel is required to submit to the FDA next week.

Menthol-flavored cigarettes account for about 30% of total cigarette sales in the U.S. The issue is of major importance to Lorillard Inc. (LO), maker of the leading menthol-flavored brand, Newport. The product accounts for roughly 90% of the company's sales. Altria Group Inc. (MO) and Reynolds American Inc. (RAI) also market menthol-flavored cigarettes but aren't as reliant on them for overall sales.

Share prices of the major tobacco companies were higher Friday as some analysts predicted the FDA wouldn't move forward with the panel's recommendation. Lorillard recently rose 8.5% to $85.46. Altria is up 1.3% to $24.75 and Reynolds American recently rose 2.4% to $33.64.

In an interview Lorillard Chief Executive Murray Kessler said the company disagrees "fundamentally" with the panel's conclusions, and said they aren't substantiated by science. "Menthol cigarettes are no more dangerous than a nonmenthol cigarette."

The tobacco products advisory panel said it was concerned about a rise of menthol cigarette smoking among adolescents and the fact the products "are now smoked by most African-American smokers." The panel said addition of menthol to cigarettes reduces the harshness of smoke and "may increase the likelihood of nicotine addiction in adolescents and young adults who experiment with smoking" and have an "adverse impact" on public health.

The panel's chairman Jonathan Samet, a medical professor at the University of Southern California, said, "I think it's for FDA now to decide what action, if any, they will take." He noted that FDA is required to take other things into account if it were to ban menthol, including an industry report as well as any adverse impacts like an illegal contraband market.

David Adelman, an industry analyst with Morgan Stanley, said the panel's report "is a better outcome than what the market was fearing" because it made no specific policy recommendation to the FDA.

"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," Mr. Adelman said. "I remain of the view that it's unlikely that the FDA will ban menthol."

Credit-rating firm Moody's Investors Service also said a complete ban on menthol-flavored cigarettes by the FDA is unlikely, but that the industry could weather a ban. Cigarette-sales volumes would decline about 8% to 10% in the year the ban is implemented, and then likely revert to the long-term average of declines of 3% to 4% a year, Moody's said.

In a statement, R.J. Reynolds Tobacco, part of Reynolds American Inc., said it would "looks forward to participating in further review of menthol cigarettes by FDA." Altria couldn't immediately comment on the tobacco panel recommendation.

Tobacco companies, in a draft summary of a separate industry report made available by the FDA, said the scientific data demonstrate that there is no difference in disease, initiation, cessation or dependence between menthol-flavored and non-menthol cigarettes.

"As a result, there is no scientific basis to support the regulation of menthol cigarettes any differently than non-menthol cigarettes," the industry report said.

In fact, in deciding whether to remove menthol-flavored cigarettes from the market, the FDA is required to take into account other factors such as whether a ban would create other problems such as an illegal contraband market.

Samet said the panel couldn't conduct an analysis on contraband and concluded that FDA would need to do so if it decided to take any action on menthol.

-By Jennifer Corbett Dooren, Dow Jones Newswires; 202-862-9294; jennifer.corbett@dowjones.com

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