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State Tobacco Settlements, Life Science R&D Threatened by Lawsuit?

April 04, 2003

A recent $10 billion judgment against Philip Morris may have the tobacco giant filing bankruptcy. Philip Morris has claimed it cannot post a $12 billion bond to appeal a lawsuit in Illinois or even meet the $2.6 billion payment due mid-April for the 1998 settlement with the states.

The tobacco company's actions are expected to have repercussions for several states counting on the funds to finance TBED initiatives. Among those threatened are Michigan's well known $1 billion life science investment over 20 years. One-fifth of Pennsylvania's future tobacco settlement payments are targeted toward life science technologies. And, the Missouri legislature is considering a bill that would commit one-quarter of the state's settlement money to the life sciences, beginning in 2006.

If Philip Morris misses a tobacco settlement payment due later this month, it may result in more budget cuts in states that are planning on using the funds to help balance their budgets. Ohio, for example, is expecting $126 million from Philip Morris on April 15. Roughly two-thirds, or $82 million, of that money would go toward the state's current deficit. Ohio Governor Bob Taft said the state will have to consider additional cuts if Philip Morris withholds all or some of its payment.

Other states have sold or are planning to sell bonds backed by the tobacco settlement payments to fund TBED or balance budgets. With the increased prospect that the court-required 25 years of settlement payments may not materialize, investors are dumping their bond holdings and prices are plummeting, according to an April 3 New York Times article. The Times points out that Virginia canceled its bond offering earlier this week, and California is delaying one after seeing the price of its previous bond drop 14.4 percent in the last two weeks.

The lawsuit that set these developments in motion was a class-action consumer fraud suit filed in Illinois on behalf of smokers of Marlboro and Cambridge's "light" cigarette brands. Philip Morris lost the suit and the court ordered a $10 billion judgment and required a $12 billion bond for Philip Morris to appeal.

Coupled with Standard & Poors warning last Friday that the Philip Morris corporate bond rating might be lowered to junk status, the news sent tobacco stocks tumbling and the company openly discussed the possibility of bankruptcy if the Illinois judgment should stand. Anti-smoking groups have called it a bluff to pressure the courts into lowering the appeal bond and award.