FDA Preps Final Menthol Report for Public Comment

SILVER SPRING, Md. -- More than 10 months since the Food and Drug Administration's (FDA) Tobacco Products Scientific Advisory Committee (TPSAC) submitted its report on the use of the FDA completed its own independent review of the available science related to the impact of menthol in cigarettes on public health. The agency then submitted the report to external scientists for a peer review. In addition to its final report, the FDA said it will post the scientists' feedback and the agency's response to that feedback for public comment.

The agency noted that public comments on the final report may provide additional evidence or emerging data. The FDA will consider these comments, along with the information it already has from its report; the TPSAC reports and public comments; and from the industry perspective document.

TPSAC recommended in its March 2011 report that removing menthol from cigarettes would benefit public health.

The FDA's final assessment was originally expected to be released late last year, according to Bonnie Herzog, managing director, Beverage, Tobacco & Consumer Research, at Wells Fargo Securities.

In an e-mail late yesterday, Herzog said the pending peer review and the FDA's preliminary assessment of the science of the effect of menthol cigarettes on public health has been an overhang on Lorillard's stock recently. Lorillard Inc. stands to lose the most from any menthol ban or restrictions because it is the maker of Newport brand cigarettes, the most popular brand of menthol cigarettes on the market.

"If the preliminary peer-reviewed assessment of the science on menthol further supports TPSAC's conclusion (the elimination of menthol cigarettes would benefit public health) or takes it a step further by recommending specific menthol regulation and results in more uncertainty, we believe the downside risk from the market's reaction to this could be around 5 to 10 percent," Herzog stated.

"However, if the peer review and preliminary scientific assessment states the opposite, we feel the upside to the stock is modest or capped since the uncertainty and overhang remain, given it will likely be a long, drawn-out process."

Herzog added that the menthol issue is looking at a long road ahead.

"We still believe an outright ban on menthol by the FDA is highly unlikely and we are concerned that there is more downside risk to the stock at current levels based on the potential for incremental negative news/headlines or continued uncertainty. Furthermore, we expect the menthol review process will likely be drawn out over several months," she concluded.