Will Cigarette Maker Reynolds Try Kicking the Habit?

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Niconovum was formed in 2000 by Karl Olov Fagerström, whom the company's Web site describes as "one of the world's leading experts on smoking cessation and nicotine dependence." Located in Helsingborg, 35 miles north of Copenhagen, the company develops nicotine replacement therapies, or NRTs, that help calm withdrawal symptoms and cravings for those kicking the habit by normalizing the level of nicotine receptors in the brain. The company could not be reached for comment.

FDA Regulation Looms

The rumored deal comes as Reynolds fights recently imposed regulations by the Food & Drug Administration. If the deal goes through and Niconovum products were introduced to the U.S., Reynolds would become the first company that is regulated by the FDA on both drugs and tobacco. In June, President Barack Obama signed a law allowing the FDA to regulate tobacco products. Along with other tobacco companies, two of Reynolds' subsidiaries, R.J. Reynolds and Conwood, have filed suit challenging some of the provisions of that new regulatory framework.

David Howard, a spokesperson for Reynolds, declined to comment on the speculation surrounding the possible acquisition. He emphasized the company's desire to "offer a total tobacco portfolio" and to continue to expand beyond cigarettes, as evidenced by its May 2006 takeover of Conwood smokeless and the introduction of such new products as Camel snus, which is smokeless, finely ground tobacco sold in small pouches. "As [Reynolds CEO] Susan Ivey has said in calls before, we're always looking at opportunities that would be strategic moves, as any company should be doing," he said. An investor presentation scheduled for Nov. 16 may shed more light on the company's plans.

In any event, the quit-smoking business is likely to be a small sideshow for Reynolds or any other big tobacco company for the immediate future. According to the Journal, the deal's value is estimated to be around $45 million. Given that Reynolds' 2008 net income was $1.34 billion, says Wrede, "the size of the nicotine replacement market is too small to be currently relevant, but it might be a cheap hedge in case smokers are increasingly looking for non-tobacco nicotine alternatives."

Publicity Stunt?

But as Morningstar's Gorham points out, Reynolds can make far more money convincing people to smoke than helping them quit. The cost per unit to produce cigarettes is extremely low—operating margins average 25%-30% industrywide, he says, which is high for consumer goods. (Pepsi (PEP), by comparison, which enjoys enormous scale and volume operating margins, reaches into the high teens, according to Gorham.)

It's unlikely that returns from smoking-cessation products can compete with that anytime soon. "I think we're talking 20 years-plus at this point before tobacco sales are offset by other sources," says Gorham.

Indeed, some view any talks between Reynolds and Niconovum as more of a publicity stunt, designed to place Reynolds in a better light. "This is just a distraction from what their core business is, to still make the most profit from cigarettes—which, by the way, is the most lethal product they sell," says Richard Hurt, director of the Nicotine Dependence Center at the Mayo Clinic in Rochester, Minn. "Nothing surprises me about tobacco companies anymore, they really just continue to morph every time they get the chance to do so."

Deprez is a reporter for BusinessWeek.