Cigarette Maker Buys Quit-Smoking Company

Reynolds American, Maker of Camel Cigarettes, Will Buy Niconovum

By ALICE GOMSTYN
ABC NEWS Business Unit

Dec. 2, 2009 —

Reynolds American today confirmed news that will leave many scratching their heads: The country's no. 2 tobacco company and the maker of Camel cigarettes will buy a Swedish maker of products designed to help smokers quit.

Reynolds American said it will pay $44 million for Niconovum, which makes nicotine gum and other nicotine replacement products designed to wean smokers off cigarettes. The firm was founded by Karl Olov Fagerstr??m, who the company's Web site trumpets as "one of the world's leading experts on smoking cessation and nicotine dependence."

Purchasing the company "runs totally counter to the mission statement of (Reynolds American subsidiary) R.J. Reynolds," Gregory Connolly, a Harvard School of Public Health professor who researches tobacco products, recently told ABCNews.com. "I'm astounded."

In a statement, Reynolds American president and CEO Susan M. Ivey said the acquisition "extends the harm-reduction strategies RAI and its operating companies have been developing over the past several years."

In the long term, she said, buying Niconovum will allow Reynolds "to provide adult tobacco consumers with innovative cessation products that have the potential to reduce the risks of diseases and death caused by tobacco use."

The deal is expected to close by the end of the year.

David Sweanor, the former counsel of Canada's Non-Smokers' Rights Association, told ABCNews.com that he's been hearing from industry contacts and others about the potential acquisition for months. To Sweanor, who spoke to ABCNews.com last month, the buy marks the next step in something tobacco companies have taken a heightened interest in recently -- marketing nicotine products other than cigarettes.

Sweanor said Reynolds could find new profit from Niconovum products by transforming them into longer-term nicotine substitutes that consumers could use for months or years instead of weeks.

The Niconovum purchase comes in the wake of increased focus by Reynolds and its chief rival, Altria, the country's No. 1. cigarette company, on another cigarette alternative -- smokeless tobacco.

Reynolds America bought 200-year-old smokeless tobacco maker Conwood Company in 2006. Altria closed on its purchase of U.S. Tobacco, the firm behind leading smokeless tobacco brands Copenhagen and Skoal, earlier this year.

These moves could help get the companies off "an unsustainable path" and compensate for falling cigarette sales, Sweanor said.

To be sure, the market for smokeless tobacco is still a fraction of that for cigarettes. But the volume of cigarettes sold at grocery stores, drug stores and mass merchandisers such as Walmart declined more than 5 percent since last October and was down more than 7 percent the year before, according to market research giant Nielsen.

Both anti-smoking products and chewing tobacco have seen increased sales.

Less Dangerous Than Cigarettes?

Sweanor, an adjunct law professor at the University of Ottawa, said that while smokeless tobacco products still contain addictive nicotine and have been linked to mouth and other cancers, they aren't as harmful to consumers' health as cigarettes.

Cigarette companies have become "social pariahs by selling a product that kills half their consumers," he said.

By selling smokeless tobacco, Sweanor said, cigarette companies can "morph the way many other industries have historically morphed into selling products that are far less hazardous."

The "less hazardous" claim eventually could win the blessing of the Food and Drug Administration. Star Scientific Inc., a company that specializes in smokeless tobacco, is seeking approval from the FDA to market two of its products as having "modified risk" under the new Family Smoking Prevention and Tobacco Control Act. It's a designation reserved for products that, according to the 2009 law, "significantly reduce harm and risk of tobacco-related disease to individual tobacco users."

Sweanor compared cigarette companies' shift to smokeless tobacco to automobile companies that now sell far safer cars and pharmaceutical companies that now sell life-saving drugs but that, a century ago, were "snake oil salesmen."

Altria, the country's no. 1 cigarette company, doesn't quite see it that way, making no claims that its smokeless tobacco products are any safer than its cigarettes.

"If a consumer is concerned about the harm caused by tobacco product, the best thing to do is quit," Altria spokesman David Sutton said flatly last month.

"For Altria," he later added, "the business is about providing a return to its shareholders."

The reason that Altria bought U.S. Tobacco is because the market for smokeless tobacco has been growing some 5 to 6 percent each year in recent years, Sutton said.

The purchase "was a good opportunity to acquire two leading brands in that category," he said.

Exactly why is the market for smokeless tobacco growing?

Experts say that the belief that smokeless tobacco is better for you -- or at least, less worse for you -- than cigarettes may be part of it. But the proliferation of smoking bans in the U.S., whether it's in restaurants or offices, also plays a big role.

"There's a wide variety of products at a wide variety of price points" that people can turn to when they can't light up, said Chris Growe, an analyst at Stifel Nicolaus.