Why does Philip Morris want the FDA to regulate cigarettes?

Commentary about business and finance.
July 25 2002 12:24 PM

Smoke Screen

Why is Philip Morris supporting FDA regulation of cigarettes?

Illustration by Robert Neubecker

Philip Morris, the nation's largest cigarette manufacturer and historically a leading opponent of tobacco regulation, has broken with the rest of the industry and is embracing the government intervention it has spent decades fighting.

Next week, Senate health committee Chairman Ted Kennedy, a longtime Philip Morris nemesis, is holding hearings on a bill that would put cigarettes under the oversight of the Food and Drug Administration. In a shift that has surprised both allies and opponents, Philip Morris lobbyists say they are eager to see the Kennedy bill move forward.

Philip Morris believes in "soup to nuts regulation of the entire industry, and we think that the FDA should be involved in all of that," says chief legislative counsel Mark Berlind. He says the company wants to see federal oversight of cigarette ingredients, warning labels, manufacturing, and marketing—with, he adds, a few limitations. But more on that later.

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Philip Morris' flip-flop has left the rest of the tobacco industry feeling confused, angry, and jilted. "They are impenetrable to me. Their strategy is impenetrable, their positions are impenetrable," says a veteran lobbyist for one of the cigarette makers opposing FDA regulation, who spoke on the condition his name not be used. "I find their positions to be nuts." By endorsing even limited regulation, he says, Philip Morris is opening a Pandora's box.

The smaller companies—R.J. Reynolds, British American Tobacco, Lorillard, and chewing tobacco and cigar manufacturers—all stridently oppose FDA regulation.   

"It's as fractured as the industry has been on an issue," says Robert Campagnino, senior tobacco analyst for Prudential Securities.

It wasn't so long ago that Marlboro-maker Philip Morris was public enemy No. 1 in Washington. In 1998, Philip Morris spearheaded a $100 million tobacco-industry advertising and lobbying blitz to fend off the legislation sponsored by Sen. John McCain to put the industry under FDA control.

Its fight was successful, and today cigarettes have less federal oversight than hot dogs. But $74 billion in punitive-damage judgments and more than 1,500 current lawsuits can make even the most recalcitrant corporation rethink its strategy. "We want people to know that we are dealing with the issues that arise from this product, and we think that FDA regulation is the best way to get there," says Philip Morris' Berlind.

Philip Morris' quest for governmental approval is not masochistic: There are solid business reasons for it. The company, which commands more than half of the U.S. tobacco market, earned $20 billion last year from domestic cigarette sales. But that market is, literally and figuratively, dying off at 2 percent to 3 percent a year. Philip Morris sees the future in a line of "safe" cigarettes it is developing. An FDA stamp of approval for them would be a major marketing asset. With its commanding share of the U.S. market, the company figures it can work within FDA rules to swamp its smaller competitors.

"The way they calculate it is they are going to lock in their market share so they can go to the investors and say, 'Look, we're practically a utility. We can guarantee this revenue stream. There aren't any risks out there from government, we've solved them all,' " says James Derderian, who was chief of staff to the Republican-controlled House Commerce Committee during the late 1990s tobacco wars.

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