Tobacco Bill Could Snuff Out RJR’s Smokeless Strategy

Putting tobacco under the regulatory umbrella of the FDA has divided the industry.

For anyone considering putting a menthol cigarette in their mouth during a long conference call, Reynolds now offers the perfect product. Snus, which means snuff in Swedish, is a flavored mini-teabag of pasteurized tobacco, sold chilled in tins.

After test runs in Columbus, Ohio, and Portland, Ore., three years ago, RJR now sells the import in 100,000 locations nationwide. A tin of 15 costs $4.50.

But this kind of innovation may be the last of its kind after this year’s big tobacco bill, sponsored by Sen. Edward Kennedy, turns into law. The bill, which would put tobacco under the regulatory umbrella of the Food & Drug Administration (FDA), is expected to easily pass through the Senate on Tuesday or Wednesday, after getting cleared by the House in April, and then quickly get a presidential signature.

The bill has divided the industry. Altria ( MO – news – people ), which makes market-leading menthol cigarettes, helped write the bill, which critics say will institutionalize its market share. The No. 2 tobacco maker, Reynolds American ( RAI – news – people ), which makes Camels, has been waging a lonely battle against it.

Kennedy’s bill would allow the FDA to play gatekeeper to tobacco products like Snus and newer smokeless tobacco lozenges and sticks. The legislation also contains language preventing tobacco companies from saying that smokeless tobacco is less hazardous than cigarettes. Supporters argue that the FDA will finally be able to study cigarette ingredients. And by toughening regulations, it could in the long run reduce smoking rates.

Reynolds won’t disclose sales, yet it did recently invest in a new Snus factory. Analysts say Camel Snus looks like a surprise hit in an innovation-challenged industry. Snus users tend to be quitters or banned-at-work smokers who need a fix, but don’t like wearing patches or chewing GlaxoSmithKline’s ( GSK – news – people ) Nicorette. The spit-free Snus product is aimed at people on the coasts who wouldn’t ever be caught dipping Copenhagen or Skoal.

“We do believe it’s a viable product offering or we wouldn’t have gone nationwide with it,” says Reynolds’ David Howard.

A new hit product would be a boon for Reynolds, which has seen its cigarette market share fall. Last year Camel sales dropped 4% to 23 billion cigarettes. Company revenue fell for the first time since 2003.

Undiversified tobacco companies stand to lose if there were a mass migration to smokeless products like Snus. Another loser would be the Feds, who now collect $1 a pack in taxes on cigarettes.

Hostility toward Reynolds’ smokeless strategy came out during the Kennedy tobacco bill’s mark-up session last week. “The best marketers, and particularly the people who make Camels, they really do stay a step ahead of the sheriff,” said Ohio Sen. Sherrod Brown. Brown considers Snus and another new Camel invention, dissolvable nicotine mints called Orbs, as transparent attempts to market tobacco to children.

What’s ironic is that the product works much like a nicotine replacement for quitters. A 2007 Lancet study of 280,000 Swedes from 1978 to 2004 found no increased incidence of oral or lung cancer among Snus users, but a “tentative” risk of increased pancreatic cancer. Sweden has the lowest lung cancer rates in Europe, since so many adults there opt to Snus instead of smoke. A study in the medical journal Harm Reduction last year found that Snus is a “pathway from smoking, not a gateway to smoking.” No surprise there, since it does taste like a soggy cigarette.

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