Tobacco Documents Online

tial4am EDT G6-Aug-96 Brown Brothers Harriman (Nelson, J.G.) MO MO: ROGERS WIN IMPdRTANT; FDA'S "REGULATI6NS" BEGIN LEGISLATIVE PROCESS • BBH BBH BBH BBH BBH BBH BBH BBH BBH BBH BBH BBH BBH BBH BBH BBH BROWN BROTHERS HARRItMiN & CO. PHILIP MORRIS (OUTPERFORM/BUY) JAY NELSON, CFA (212) 493-8281 M0: ROGERS WIN IMPORTANT; FDAIS "REGULATIONS" BEGIN LEGISLATIVE PROCESS EPS P/E Dividend Price --------------------- ------------- ---------- 5-Yr. 52-Wk 8/26* 12/95 12/96E 12/97E 12/96 12/97 Rate Yld. Grwth Range ------- ----- ------ ------ ----- ----- ----- ---- ----- ------- • i MO $91 1/4 $6.51 $7.70 $8.85 11.9 10.3 $4.00 4.4% 14% $108-72 An Indiana jury by a 6-0 vote returned a verdict in favor of cigarette manufacturers in the Rogers case Friday evening. The jury ruled that Mr. Rogers, by choosing to smoke and continue smoking, was more than 50% negligent in bringing about the conditions that caused his death from lung cancer some years ago. Mr. Rogers had begun smoking at age 5. We had viewed Rogers as a 50-50 proposition and many others appear to have shared that view. Coming on the heels of the loss in the Carter case in Florida on August 9, the Rogers win undercuts the notion, advanced by some, that there had been a sea change in jurors' view of the smoking-and-health issue and cigarette company responsibility for s.oking-related illnesses. On the other hand, the Rogers jurors werenvt allowed to see the so-called Brown and Willia.son documents and other cigarette manufacturer internal documents which cast the companies in a poor light on the issue of nicotine addiction. In Carter, the jury made it clear that the Brown and Williamson documents had played some role in their 6-0 vote for the plaintiff. (Carter will shortly be appealed to the First Florida Appellate Court.) There are many more cases pending in Florida, several of which will be heard before year end. Even though juries there may be allowed to see some of the internal documents and even though Florida juries can in certain cases assess damages even if the defendant is found only 1% negligent, the ballgame has been changed by Rogers. Investors are in thQ process of coming to terms with a new paradigm: the industry is going to lose a few cases, not a lot of cases, but so.e; the decades-long undefeated record is history. However, the industry is profitable enough to withstand a few defeats and still prosper. In another cigarette-related matter, the FDA and President Clinton issued regulations asserting FDA jurisdiction over cigarettes as alleged "drug delivery devices" and restricting cigarette marketing, both advertising and promotion. The cigarette manufacturers are suing to block the FDA's move to assert regulatory jurisdiction as an illegal grab of power from Congress and the industry in our view has powerful arguments. Most likely a law will be passed in the next Congress restricting cigarette arketing in soee ways--most obviously to limit underage exposure to ads and block, as best as can be done, underage access to cigarettes--while leaving the FDA out of the loop, i.e., with

no regulatory oversight over cigarettes. Such a law would moot the industry's suit vs. the FDA. i MO is trading at $91 or so, up $3 from Friday's close. The 1996-basis and 1997-basis relative P/Es are 0.72 and 0.66, respectively. We see MO at at least a 0.77 1997-basis relative in 12 months, up 16% to $106 in a flat market. We continue to rate Philip Morris Outperform/Buy. *Intraday price First Call Corporation - all rights reserved. 617/345-25@0 END OF NOTE • •