--CEO says stalled regulatory action by the FDA has hindered Lorillard's ability to bring new products to market --Portfolio expansion plans have been slowed as Lorillard awaits approval --FDA has yet to approve one substantial equivalent application since premarket approval was required in March 2011 By John Kell Lorillard Inc. (LO) Chief Executive Murray Kessler said stalled regulatory action by the U.S. Food and Drug Administration is hindering the tobacco company's ability to bring new products to market this year. During an earnings conference call with analysts, Mr. Kessler said that the maker of Newport and Maverick had hoped to launch new tobacco products this year that were intended to help maintain 2011's strong growth. But the company's portfolio expansion plans have been "temporarily slowed down," according to Mr. Kessler, as so-called substantially equivalent products--like the ones Lorillard is hoping to launch--now require FDA approval. Substantial equivalence is one of three methods that tobacco companies like Lorillard can utilize to win regulatory approval for new tobacco products or line extensions. The FDA was given jurisdiction of a variety of tobacco products as part of the Family Smoking Prevention and Tobacco Control Act, which was signed into law in June 2009. Lorillard, which reported disappointing second-quarter results on Wednesday, said the FDA has yet to approve one substantially equivalent application since premarket approval was required beginning in March 2011. In recent years, tobacco firms have marketed new products, such as snus, a spit-free tobacco pouch, and dissolvable tobacco products as a way to keep smokers engaged. That innovation is important as traditional cigarette volumes have been declining for years. Lorillard itself has benefited from innovation as the 2010 launch of nonmenthol Newport Red has seen strong sales. The company debuted Newport Red after it felt the brand became strong enough to branch out into other segments without undermining the original franchise. Mr. Kessler said major competitors were able to launch new variations of existing brands as they had those products in test market prior to the FDA's deadline, while Lorillard only began to ramp up new product development after Mr. Kessler joined the company in September 2010. He said Altria Group Inc. (MO) in particular has been able to launch a steady stream of new products over the past year and a half, while the FDA hurdle has delayed Lorillard's ability to tap segments it doesn't yet compete in. Altria introduced over 50 smokeless products last year, launches it says are vital to keep consumers interested in the category. Lorillard reported total wholesale shipments volume in 2011 jumped 6.9% from the prior year, helped by gains for Newport and Maverick and outperforming the industry's 3.5% decline. But earnings results for the first two quarters of 2012 have fallen short of Wall Street's expectations as volume declined. "Our plans for the rest of 2012 do not rely on new products, but we are ready with fully tested products, so approval by the FDA could quickly follow with a launch that we would view as upside to our plans," Mr. Kessler said. Mr. Kessler said that although Lorillard has had meetings with the FDA during the quarter, it isn't quite sure where it stands in the regulatory approval process. He said while Lorillard had a conversation about the submission process with the FDA as early as last week, the agency won't disclose the timeline of the approval process. "This is a big deal to this company," Mr. Kessler said. "We have tried to use every avenue possible." That includes the submission of a citizen petition requesting the FDA allow the products to begin to hit retail shelves but give the FDA to ability to make changes to the new products or pull them from the market if needed. Mr. Kessler said at this point, Lorillard isn't planning any legal action. For its part, the FDA said there are three main pathways that can be utilized to bring a new tobacco product to market, including a new product application and exemption from substantial equivalence. Ultimately, the federal government contends the Tobacco Control Act is important for the protection of public health. -Write to John Kell at john.kell@dowjones.com Subscribe to WSJ: http://online.wsj.com?mod=djnwires
