CHICAGO--()--According to a special report issued by Fitch Ratings today, the outcome of the Food and Drug Administration's (FDA) menthol review poses significant risks for tobacco companies selling menthol cigarettes, and potentially considerable risks confront those selling unflavored cigarettes. The regulations, which will result from the FDA's menthol review, are uncertain and the timeline for potential enforcement is unclear, making the risks unquantifiable at this time. However, Fitch considers the qualitative substance of these risks in concert with the overall risks of particular credits.
As a result of the enactment of The Family Smoking Prevention and Tobacco Control Act, the FDA is tasked with developing a report on the risks of menthol flavoring and issuing a recommendation based on its findings. The FDA's report will be based on scientific findings, but the public studies done to date are largely either inconclusive or contradictory. Based on the science as a whole, Fitch believes it is difficult to conclude that menthol cigarettes are more harmful than unflavored cigarettes. However, risk for tobacco companies lies in the FDA potentially choosing to give more weight to studies that find menthol cigarettes harmful for reasons of better data collection, better study methodology, or other factors.
'With its dependence on menthol cigarette sales, Lorillard clearly faces the most risk in the FDA's menthol review,' said Christopher Collins, Associate Director at Fitch.
Lorillard, Inc.'s Newport brand, a mentholated cigarette, accounted for more than 87.5% of the company's 2009 cigarette volume and 91.5% of its 2009 net sales. Fitch believes Reynolds American Inc. also faces a high level of risk with its large menthol share, but the company has substantial share in unflavored cigarettes and is diversified within the tobacco space. While Altria's Philip Morris USA certainly has significant share within menthol due to its Marlboro brand, it does not have significant share with any other brand. Additionally, in the unflavored cigarette space, it has commanding market share. 'In the worst case scenario, a ban on menthol cigarettes will be financially devastating for the industry, given that they represent almost 30% of the market,' said Wesley E. Moultrie II, Senior Director at Fitch.
The full report 'The Great Flavor Debate: Assessing the Risk of a Menthol Ban' is available on the Fitch Ratings' website at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Related Research: The Great Flavor Debate: Assessing the Risk of a Menthol Ban (Review of FDA Mandate to Regulate Menthol Cigarettes)