- The Washington Times - Wednesday, March 22, 2000

The tobacco industry avoided what had the potential to be its most serious threat yet when the Supreme Court ruled yesterday that the federal government could not regulate tobacco as a drug, sending cigarette makers' stocks soaring immediately after the announcement.

But tobacco companies' stock prices settled back down in the afternoon, amid still-present fears that the industry will be hurt by an individual lawsuit in California and a class-action suit in Florida.

Analysts said if the Supreme Court had allowed the Food and Drug Administration to regulate tobacco, the agency could have reduced or even banned nicotine in cigarettes, crippling the industry. The court decided, 5-4, that the FDA does not have oversight over tobacco.

"It was the more dangerous of the operative issues surrounding the tobacco industry," said Roy Burry, a tobacco analyst with Brown Brothers Harriman in New York.

He called the FDA's attempt to regulate tobacco products initially made in 1996 a "backdoor way the Clinton administration was trying to ban cigarettes."

Mr. Burry said the tobacco companies' $206 billion settlement made with 46 states in 1998 did not harm the industry, because makers just charged more for their products.

Ann Gurkin, an analyst with Davenport & Co. in Richmond, said the Supreme Court's pending ruling had been hanging over the tobacco companies but the decision wasn't a surprise.

"You never know [for sure] until the court rules," she said.

"The market is now focusing on the Florida class-action suit," Mr. Burry said. A jury is expected to decide on a multibillion-dollar punitive damage package in the next few weeks, after it found in July that the nation's five largest tobacco companies make a deadly and defective product.

That suit and a California jury's decision Monday to award $1.7 million to a woman with lung cancer she attributed to smoking sent tobacco stocks back down yesterday after their early rise.

Philip Morris Cos. Inc. shares were the most actively traded yesterday, reaching a high of $22.13 and a low of $19 on the New York Stock Exchange. The stock closed at $20.31, up 38 cents. R.J. Reynolds Tobacco Co., the second-largest tobacco company, saw its stock bounce from a low of $15.94 to $17.75 before coming to rest at $17.06 at the NYSE's close up 56 cents on the day.

"The concern in the marketplace right now is that the industry will be forced to post some kind of bond in the hundreds of billions of dollars" in punitive damages in the Florida suit, said Bonnie Herzog, a tobacco analyst with Credit Suisse First Boston.

She said that poses a bigger threat than regulation by the FDA.

Tobacco company spokesmen said their businesses are willing to talk with Congress or federal agencies about regulation.

"Our position was not about opposing regulation. It was about opposing inappropriate regulation that could have led to prohibition," said Brendan McCormick, spokesman for Philip Morris USA of New York.

In 1996, the FDA said it had the authority to regulate tobacco sales under the Food, Drug and Cosmetic Act of 1938.

Yesterday's ruling will not substantively change the way tobacco companies do business, though the FDA has begun to institute regulations regarding sales and marketing of cigarettes to children. That's because under the state settlements with the companies, the tobacco industry agreed to restrict its marketing campaigns, especially those targeted at children. The FDA rules, which are now moot, did not go much beyond those imposed by states, said Tommy Payne, an R.J. Reynolds spokesman.

Mr. McCormick said that Congress may take up the issue, but it is not clear to which agency they would give the power of regulation.

Mr. Payne and a spokesman for Brown & Williamson, the nation's third-largest cigarette maker, said their companies also will hold discussions with members of Congress.

"There are any number of consumer products that have reasonable regulatory structures," Mr. Payne said, and tobacco could be subject to similar rules.

The spokesmen would not say exactly how much or what type of regulations they would accept, pending discussions with Congress. They also could not discuss the potential effects of the Florida case, since the case's judge has prohibited it.

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