A two-faced tobacco plan

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Smoke or quit. Bennet LeBow has his bets covered either way.

Vector Group is on a quest to become the only company to market traditional cigarettes as well as smoking-cessation technology-a fitting move for industry contrarian Mr. LeBow, Vector's chairman-CEO. He broke ranks with Big Tobacco in the mid-`90s by admitting nicotine is addictive and smoking causes cancer in return for a $1 milcauses cancer in return for a $1 million settlement with the states, thereby avoiding the industry's court battle with attorneys general that resulted in the $206 billion Master Settlement Agreement.

But spending more money than it makes to launch a nicotine-free smoke is a gamble for this small player, which analysts say captures only about 2% of the U.S. tobacco market, primarily from its Liggett Group subsidiary's traditional cigarettes Eve and Liggett Select.

Vector plans to spend $40 million-nearly twice its 2001 net income of $20.7 million and almost four times last year's total media spending-to introduce nicotine-free, premium-priced Quest regionally in July and nationally in September. Vector last year spent $14 million-$10 million to support its Vector Tobacco subsidiary's launch of reduced-toxin cigarette Omni and $4 million for the debut of its Liggett Group's menthol smoke Jade, according to Taylor Nelson Sofres' CMR. Trone Advertising, High Point, N.C, handles Omni, Quest and Jade.

The likelihood Quest will meet instant market success is slim, given slow sales of Omni and other non-traditional smokes. Brown & Williamson Tobacco Corp. launched low toxin Advance in Indianapolis last fall, and Philip Morris USA said developing a reduced-risk smoke is a priority.

But cigarettes without the "nic kick" are another story. In 1989 Philip Morris introduced nicotine-free Next and Merit De-Nic, which failed. "There is a taste and an impact associated with nicotine, and the absence of that was one reason why Next failed," said David Adelman, a Morgan Stanley Dean Witter analyst.

Mr. LeBow vowed Quest is unique. "We believe this product will taste, smoke and burn like a premium cigarette without the nicotine," he said in an April conference call, acknowledging Quest will require consumer education. (Mr. LeBow declined an interview.) But industry watchers are skeptical. "It's somewhat risky," said Bonnie Herzog, analyst at Salomon Smith Barney. "They have the technology, and I think they need to pursue it, but it's going to be tough."

Quest is made from tobacco genetically modified by patent-pending technology, which Vector hopes will be approved by the Federal Drug Administration for smoking-cessation.

But can one company successfully market both cigarettes and smoking-cessation technology in an environment skeptical and unforgiving of Big Tobacco? Some observers think Vector's small share could be an asset.

"As a company with a 2% share, in theory, it can do both," Mr. Adelman said. "It would be harder for the market leader to come out with a cigarette that would be used for smoking cessation."

But breaking into the already-saturated smoking-cessation market is no easy task. "In straight competition [against smoking-cessation tools] the cigarettes would not succeed," said Neal Benowitz, a professor of medicine specializing in nicotine at the University of California at San Francisco. "It might be useful if it was being used as part of a way to help someone quit smoking," along with another smoking-cessation tool.

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