Can Star Scientific Leave its Big Tobacco Past Behind?

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While Star Scientific (NASDAQ:STSI) is remoulding itself, focusing on dietary supplements rather than smokeless cigarettes, the company is still haunted by Big Tobacco.

The company’s third quarter earnings report, which was filed with the U.S. Securities and Exchange Commission on November 9, disclosed that the Star Scientific received a $5 million settlement from Reynolds American (NYSE:RAI) for a lawsuit that lasted years. The Virginia-based company, which patented several tobacco curing methods that prevented the formation of carcinogens in tobacco smoke, initiated the lawsuit in 2009. Star Scientific first accused Reynolds American of infringing on several of its tobacco-related patents during the 2001 and 2002 growing seasons. The case was settled in September of this year, according to an SEC filing.

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In early morning trading on Monday, shares of Star Scientific were down 15 percent at $2.17.

Reynolds’ smaller-than-anticipated settlement brought to light to the company’s financial problems.

In its third-quarter filing with the SEC, the company stated that it may have to seek additional funds. However, there was one caveat; Star Scientific could have difficulties obtaining debt financing because of its recurring operational losses. “There can be no assurance that the Company will be successful in obtaining such funding at commercially reasonable terms,” said the filing.

Yet Star Scientific’s third quarter results were far from dismal. For the three month period ended in September, the company reported net sales of $1.7 million, an increase from $0.4 million in the year-ago quarter. Net sales increased 450 percent since January, due in part to an increase in sales of its anti-inflammatory supplement Anatabloc. Most importantly, Star posted a net profit of $0.4 million for the period, compared with a net loss of $6.6 million in the same period last year. However, net profit included the $5 million payment from the “resolution of the Company’s litigation matters with RJ Reynolds Tobacco Company.”

“We are pleased with the robust Anatabloc sales, which have grown quarter to quarter,” said Chairman and President Paul L. Perito regarding the results. “We are equally buoyed by the fact that because there is a GNC corporate or franchise store (approximately 4,000 nationwide) within five miles or less of 95% of all Americans, access to Anatabloc is now literally within the reach of every American.”

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