NEW YORK (CNNfn) - A U.S. Supreme Court ruling that rejects the Clinton administration's attempts to regulate tobacco as an addictive drug marks a significant victory for cigarette makers, but the tobacco industry still faces a number of key legal hurdles ahead, Wall Street analysts said Tuesday.|
The Supreme Court, in a narrow 5-4 decision, upheld a federal appeals court ruling that the Food and Drug Administration does not have the explicit power to label tobacco products as drugs or regulate how they should be marketed. The court said the federal agency exceeded its authority four years ago when it enacted sweeping, White House-backed regulations intended to restrict the sale of cigarettes and smokeless tobacco to teen-agers.
Cigarette makers, which only a day earlier sustained a legal setback in a California civil lawsuit filed by a sick smoker, welcomed the ruling.
"Congress clearly never intended that one single bureaucrat in the government can decide whether cigarettes are legal in this country or not under federal law," Charles Blixt, vice president and general counsel at Winston-Salem, N.C.-based RJ Reynolds Tobacco Co., told CNNfn's "Street Sweep."
Philip Morris Cos. Inc., the world's largest tobacco company as well as the parent of Kraft Foods and the Miller Brewing Co., said in a statement that it "opposed the FDA rule because regulation of cigarettes as 'medical devices' was inappropriate and could have led to Prohibition."
New York-based Philip Morris said it supports "useful approaches" to tobacco regulation, including actions "designed to reduce youth smoking while respecting an adult's right to smoke" and government requirements to provide "additional disclosures" to smokers about cigarettes.
The court's decision shifts control over tobacco regulation to the Republican-controlled Congress. Analysts said lawmakers are expected to introduce new initiatives seeking to impose regulations on the industry, but said they doubt any such measures will come during an election year.
Former FDA commissioner David Kessler said the ruling puts the issue "squarely in the lap of Congress."
"I think Congress now has a moral responsibility to act," he said.
Tobacco stocks rise
Most tobacco stocks rose modestly on the news.
Shares of Dow industrials component Philip Morris (MO: Research, Estimates), trading near 12-month lows, gained 5/16 to 20-1/4 in New York Stock Exchange composite trading, off an earlier session high of 22-1/8. The stock was the most actively traded of the day, with about 34.4 million shares changing hands.
Philip Morris stock has been battered over the past year amid ongoing litigation against tobacco companies, falling from a 52-week high of 43.
RJ Reynolds Tobacco Holdings Inc. (RJR: Research, Estimates) stock gained 9/16 to 17-1/16, while UST Inc. (UST: Research, Estimates) added 5/16 to 19-13/16 and Loews Corp. (LTR: Research, Estimates) rose 2 to 47-1/8. American depositary receipts of BAT Industries (BTI: Research, Estimates), the parent of Brown & Williamson, slipped 11/16 to 9-9/16.
"It's a modest positive," Richard Joy, an analyst at S&P Equity Group, said of the court's ruling. "It's good news, but I don't think people are that focused on it. Most people thought it would go this way."
The firm has a "sell" rating on Philip Morris and R.J. Reynolds, the two biggest U.S. cigarette companies, saying that tobacco stocks - which already have plummeted in the past year - may have further to drop.
Analysts said the ruling gives the industry a boost. But they also noted tobacco stocks continue to be weighed down by unresolved litigation in civil lawsuits, filed by former smokers who are seeking millions of dollars in damages for smoking-related illnesses. The most closely watched case is a Florida class-action lawsuit, known as the Engle case, that observers say could result in billions of dollars in punitive damages against tobacco companies.
"Investors have placed a cloud over these stocks, and it's not to be removed until there's more certainty over how much money the companies might be liable for now and in the future," Kim Wallace, tobacco and political analyst at Lehman Brothers, said on CNNfn's "In the Money." (WAV292K) (AIF292K)
Tuesday's Supreme Court ruling comes a day after a California state jury ordered Philip Morris and R.J. Reynolds to pay $1.47 million to a former smoker dying of lung cancer. The jury found that the companies negligently designed cigarettes and committed fraud by misleading people about how much cigarettes could damage smokers' health.
In addition to state suits, tobacco companies face a lawsuit filed last year by the U.S. Justice Department seeking to recoup billions of dollars in health costs for treating sick smokers.
"The industry is making progress in alleviating" its litigation woes, Brown Brothers Harriman tobacco analyst Roy Burry said. "However, there are still some big hurdles to go."