Cigarette manufacturer Lorillard Inc (LO) recently announced that the U.S. Food and Drug Administration (FDA) has authorized the company to sell two non-menthol versions of Lorillard’s flagship Newport brand.
Lorillard’s Newport Non-Menthol Gold Box 100s and Newport Non-Menthol Gold Box are the first two products approved by the FDA among 500 applications. The two products cleared by FDA indicate that they have the same characteristics as the existing ones in the market and thus will not raise any public health questions. However, FDA has rejected four other applications of Lorillard, but did not disclose the products.
Per the 2009 law, FDA's Center for Tobacco Products must review all new cigarette or smokeless tobacco products, in addition to regulating a number of aspects of tobacco marketing and manufacturing. The law states that products introduced after Mar 22, 2011 require pre-market approval by the FDA to be sold in the market, which may be subject to similar or more restrictive procedures. However, products introduced between Feb 2007 and Mar 2011, which are already available in stores, will be under FDA review.
Though the pre-market approval process takes about 90 days, FDA is currently piled with 500 requests which are awaiting approval before entering market and 3,500 requests for products already in stores. This backlog is delaying the launch of the tobacco products in the markets and thus hurting its profitability.
Besides these regulatory restrictions, tobacco companies are suffering from the slowdown in tobacco industry, increasing health consciousness among consumers and significantly higher prices of cigarettes. Increase in cigarette prices has significantly impacted cigarette volumes.
However, the company has been putting in efforts to revive the volumes with new product launches. Despite the slowdown in the tobacco industry and higher pricing, Lorillard has managed to record retail market share growth over the last 10 years owing to its Newport brand.
The company’s launch of Newport Non-Menthol variety in Nov 2010 and the initiatives to expand the Newport Menthol brand has gained good response, despite stiff competition. The company is in the process of launching Newport Smooth Select Menthol cigarettes in the second quarter of 2013.
Lorillard is also adapting to changing consumer demands by investing in less-hazardous alternatives for tobacco. With the acquisition of blu e-Cigs brand in Apr 2012, the company forayed into the developing and profitable electronic cigarette market.
Lorillard holds a Zacks Rank #3 (Hold). Other cigarette companies worth considering are Reynolds American Inc. (RAI) and Schweitzer-Mauduit International Inc. (SWM), which hold a Zacks Rank #2 (Buy). Another consumer staples stock Flower Foods Inc (FLO) is also well placed with a Zacks Rank #1 (Strong Buy).
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