Tobacco Settlement Discussions
We all know that in the Maryland District Court case with RJR, both sides have submitted their proposed settlement offers (in early June). We know there are mediated settlement discussions coming up in August (details were posted back in March/April on PACER). While I think RJR wants to settle, they are obviously looking for the best deal they can get from Star. IMHO, Altria is now concerned about the new Star TSNA BDL patent granted by the USPTO in March 2012. Star's most recent patent (the Star Cured process that reduces TSNA's to Below Detectable Levels or BDL) is good for 20 years (it was not a continuation patent so it had a much better priority date). If RJR gets a license for this patent first, they can immediately start taking market share away from Altria.
Let's say you are a smoker (and addicted to nicotine), you would probably want to smoke a brand that greatly reduces the cancer causing TSNA's. Now that the FDA is going to require the amounts of TSNA's to be on the tobacco labels, the first big tobacco company to license Star's patents is really in the driver's seat. The tobacco industry analysts now recognize this and are asking relevant questions in the conference calls. The first company to license will have a significant marketing advantage as can be seen from the question near the end of this recent RJR conference call. http://seekingalpha.com/article/350791-reynolds-american-s-ceo-discusses-q4-2011-results-earnings-call-transcript?part=qanda
And our final question comes from Ted Jenkins of Oppenheimer. Theodore Jenkins
On the back of the comments for the patent litigation. Given those developments, I mean, despite the jury result absolving RJR of a 2-year window of direct infringement. I am concerned that there's still seemingly additional years of potentially a significant subsequent liability. But I am heartened that you would agree to enter into a mediation process. But more to my point, given these developments and given the new regulatory oversight with the FDA. And given that there are technologies that removes tobacco TSNA levels. Do you believe it would be a competitive edge to be possibly first amongst your peers to offer tobacco products embodying zero-cancer-causing agents and would that be a strategy in concert with your mission to transform tobacco, increase your share and protect your customers to the utmost of your ability?
Daniel M. Delen
Frankly, I think we're very, very confident in our sort of defenses in this case. And very confident in our position for the years going forward as well. And I think that's really all I'd like to comment at this stage on that front. We, as a company, obviously believe very much in our sort of mission in harm reduction, particularly as it applies between different product categories over time. And I think that's what our focus is. And as I described in some of the Q&A earlier is really where we are focused as a company.
So, the first tobacco company to license Star's TSNA patents will have the upper hand. For that reason, I think a deal may get done before the August mediated settlement talks....but I think the deal could get done with either Altria (Philip Morris) or RAI (RJ Reynolds).
Described below is just one of many possible win-win settlement scenarios that are now possible. The time is ripe because:
1) Star has successfully defended the TSNA tobacco curing patents at the Federal Circuit (CAFC) and the US Patent & Trademark Office (USPTO). The patents are valid and the odds the Supreme Court will step in are extremely remote (well less than 1 in 100).
2) The USPTO recently awarded Star a new key TSNA Patent that reduces the TSNA's even further, to Below Detectable Levels or BDL.
3) The FDA has recently announced new labeling requirements that will include putting the levels of various TSNA's on the cigarette labels, and
4) Star has a blockbuster new nutraceutical called Anatabloc that is now available in ~ 4000 GNC stores. Anatabloc Sales are ramping steadily, and this is before any human studies have been released (but those should be coming soon). Star will soon be cash flow positive, and with the potential liability that big tobacco faces, the tobacco companies would be wise to get a deal done sooner rather than later.
Here is the framework of a Win-Win Settlement Deal that could be worked out between Star Scientiifc and one of the Big Tobacco companies
A settlement could be structured where the first Big Tobacco company to sign a TSNA license received a partial equity ownership of Star Scientific (say 10 Million shares), but Star could retain the voting rights to those shares. As part of the deal, that BT company would have to pay a per pack royalty to Star (say 7-10 cents per pack), and would receive a paid up license once their accumulated payments reached $1.5 Billion to Star. This type of deal would equate to about $500-800 million per year in immediate revenues to Star Scientific (and immediately give CIGX about $2-4/share in earnings). It would make the big tobacco company's stock investment in CIGX worth well over $1 Billion in a year or so. So, in essence, the first big tobacco company to license could get a free license, and they could take significant market share away from their main tobacco rivals (just a few percentage points of additional market share would be worth more than a Billion $). You can play with the numbers, but you get the idea. Star might even be willing to greatly reduce past damages liability for a deal like this.
This would be a win-win scenario for both parties (but only for the first tobacco company to settle).
With the Supreme Court briefs now submitted, I think this type of scenario (or some variation thereof) is possible at any time. Keep an eye on the stock price for huge spikes on no news (I'm talking spikes of 1-2 dollars, not .30-.50).