Reynolds American (RAI) Making Stronger Moves into Smokeless, Cessation-Aids

Reynolds American, Inc. (NYSE: RAI) CEO Susan Ivey occasionally puts a dissolvable nicotine strip in her mouth in order to get a nicotine fix when lighting up is impractical or illegal, such as in a major meeting, and she believes that American's that smoke may soon follow suit, according to a recent Wall Street Journal article. The company currently offers a cornucopia of smokeless alternatives like the strips, lozenges, and snuff.

However, some tobacco-control advocates see the products as "nicotine candies designed to appeal to children."

The U.S. Food and Drug Administration is now stepping in, giving the company until next Thursday to provide research that shows how dissolvable products are used and perceived by people 25 and younger. The FDA has expressed concerns that younger people might be drawn by the products' "brightly colored packaging" and "easily concealable size."

The U.S. FDA is currently in early stages of developing regulations concerning the regulation of the tobacco industry, after President Barack Obama signed legislation last year granting this power.

Reynolds says it is cooperating and that its products are marketed for adults and sealed in child-proof packaging.

CEO Ivey says that the products will be fundamental in driving sales in the future. She, and the rest of the industry are making a migration to smokeless products, as the sales trend in cigarettes is declining whilst sales in the smokeless category are climbing.

Reynolds is taking proactive steps to diversify their offerings, including smoking cessation-aids. The company recently bought Sweden's Niconovum AB for $43 million, the first big move by a tobacco giant to move into the cessation-aids realm. Currently, Niconovum's products are only available for sale in Sweden and Denmark, but Reynold's is appealing to allow the products for sale in the U.S., to compete with the likes of Commit lozenges and Nicorette gum. Makers of quit-smoking aids must prove in clinical studies that the products are safe and effective. According to Euromonitor International, global industry sales of OTC smoking-cessation products are about $2.1 billion a year.

Reynold's currently holds a 28% share of the U.S. market, not bad, but far behind Altria's (NYSE: MO) 50% share. Altria is also taking some steps into smokeless products.

A big challenge for both companies is marketing of smokeless products. Some groups in the American Council on Science and Health argue that its a better alternative than smoking, companies are forbidden from advertising as such. Analysts believe that RAI stock could see a big boost if the company is allowed to advertise that smokeless is a healthier alternative to cigarettes, but they also recommend to not hold your breath on that one.

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