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Star Scientific leaving smokeless business
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Star Scientific leaving smokeless business

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Star Scientific Inc. said Monday it is getting out of the smokeless tobacco business, discouraged by the regulatory environment for its Ariva and Stonewall Hard products.

The company, based in Glen Allen, Va., said it will concentrate on its pharmaceutical business, which is focused on dietary supplements and cosmetic products under the brand name Anatabloc.

“Because there is a GNC corporate or franchise store (about 4,000 nationwide) within five miles or less of 95 percent of all Americans, access to Anatabloc is now literally within the reach of every American,” Paul Perito, Star’s chairman and president, said in November.

Star’s board of directors said it was “motivated to take this action in light of continued losses and low sales for our dissolvable tobacco products over the last several years.”

Despite a nearly six-fold jump in net sales to $4.51 million, it has lost $12.8 million so far in fiscal 2012 based on $20.7 million in operating expenses.

The board said restrictions under the Family Smoking Prevention and Tobacco Control Act, which went into effect in 2009, have prohibited the company from making statements about the comparative safety of various types of tobacco products.

The Food and Drug Administration held a day-long hearing Monday to hear petitions and comments about nicotine-replacement therapy products and those that could be regulated as smoking-cessation products, such as smokeless tobacco and electronic cigarettes.

The board said the regulatory act has “made it extremely difficult to effectively market our dissolvable tobacco products, notwithstanding that they represent a less hazardous alternative to cigarettes and to traditional smokeless tobacco products.”

The board said being in the dissolvable tobacco business has had “a negative impact on our ability to interest leading scientific and medical research centers in undertaking clinical research related to our anatabine compound in managing excessive inflammation.”

Star said it would try to find licensing opportunities for its dissolvable tobacco products and technology, including Ariva BDL and Stonewall BDL modified risk tobacco products and the StarCured tobacco-curing process. The acronym stands for “below detectable levels” of certain cancer-causing chemicals in tobacco, particularly when it is burned as part of smoking.

Those products could draw interest from larger manufacturers, such as R.J. Reynolds Tobacco Co., since Star received notification from the FDA in March 2011 that Ariva BDL and Stonewall BDL are not subject to regulations in the federal Food Drug & Cosmetic Act.

The company said it expects to save $1.1 million a year after exiting the dissolvable tobacco business, some coming from unidentified job cuts. It projects a $2.8 million charge in the fourth quarter.

The board’s decision is the latest in a flood of financial and legal updates involving Star.

On Nov. 16, the company said its chief executive and several long-term shareholders invested $20 million in the company. Chief executive Jonnie Williams agreed to reduce his salary to $1 a month, beginning in January, “until the company becomes profitable.” His base salary in 2011 was $1 million.

Star said in November it is facing a potential funding shortfall as early as the end of the first quarter. It said it had $10.2 million in working capital, including $9.5 million in cash.

The company's share price dropped temporarily after confirming Nov. 12 it received just a $5 million cash settlement from Reynolds. Star tried for more than 10 years to extract patent royalties from Reynolds related to a way to reduce carcinogens in cigarettes.

rcraver@wsjournal.com

(336) 727-7376

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