Star Scientific's Unstellar Performance


Quarterly losses continue to be a part of Star Scientific's (NAS: CIGX) books. The company recently reported a net loss of $4.9 million in its second quarter, as its dissolvable tobacco products continued to witness tepid sales.

With anti-smoking regulations getting stricter, does it make sense to keep a watch on Star, or do the weak numbers signal that it's time to dump the stock?

The numbers
Net sales slumped 22% from the year-ago quarter, to $262,000. CigRx, the dietary supplement product introduced in August last year, contributed $131,000 to sales this quarter. Smokeless tobacco sales remained soft, and sales volumes for Ariva fell in the quarter. The company's sales efforts also were focused on select areas, which led to lower sales.

The second quarter last year saw high expenses on account of the launch of CigRx. This time, operating expenses declined a significant 63.8%, to $4.7 million. As a result, net losses narrowed from $13.5 million to $5 million year-on-year.

Star is obviously not looking very healthy with losses on its books. However, what is note-worthy is the reduction of debt. The company has been issuing loads of new shares, which helped to reduce long-term debt to $6.31 million from $8.75 million in the year-ago period. As a result, Star's debt-to-equity ratio has improved significantly to 43.6% from 141.5%. But unless the company starts making profits, investors might eventually tire of buying its shares.

Smokeless developments
Star's focus on cigarette alternative smokeless products makes sense, and other tobacco players have a keen eye on such alternatives, too. Altria (NYS: MO) , the world's leading manufacturer of moist smokeless tobacco, reported a 3.6% rise in revenues from smokeless products in its second quarter. Reynolds American (NYS: RAI) is also promoting its Camel Snus. Right after the recent citywide smoking ban in New York City came into effect, the company launched print ad campaigns advertising Snus. It has also recently extended its dissolvable products, such as Orbs and Sticks, into new markets. Philip Morris International (NYS: PM) , too, seems interested in coming out with smokeless tobacco such as lozenges.

Clearly, with smoke-banning regulations getting stricter, the focus on alternative products is gaining ground. In such a scenario, Star's products could find a wider audience.

But, dissolvable tobacco products are not yet completely immune to regulations. Products such as lozenges have found some opposition on the grounds that they resemble candy and may be consumed by children. However, regulatory recommendations on the issue will take some time, according to the Food and Drug Administration.

The Foolish bottom line
What can we say for a company which expects losses related to its product sales to continue "for the foreseeable future"? Star is launching another dietary supplement, Anatabloc, during the third quarter, but the losses on its books shouldn't impress a prudent investor. I guess if anyone owns Star, it might largely be because of all the speculations surrounding its long-pending patent infringement lawsuit against Reynolds. I see no other reason presently for owning the stock.

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At the time thisarticle was published Neha Chamariadoes not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Altria and Philip Morris. Motley Fool newsletter services have recommended buying shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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