Despite Proposed FDA Regulations, E-Cig Industry is Not Vaporizing

Remy Merritt |

Targeting the youth isn’t anything new for cigarette companies. A 1998 study found that 95% of surveyed adolescents aged 6-12 had seen Joe Camel and the Marlboro Man more than once. This was neither the first nor the last in a collection of studies that overwhelmingly supported the correlation between tobacco advertisements and adolescent use.

The merger between technology and tobacco that has created the e-cigarettes is now a $2 billion industry. In 2013, Wells Fargo estimated the industry would top $10 billion by 2017, while Bloomberg Industries projected electronic cigarettes and their accessories would surpass traditional cigarette sales by 2047. Attractive advertising has drawn in smokers young and old, but the primary target for the e-cigarette industry appears to be the same as it has always been for Big Tobacco: impressionable teenagers.

There are currently no prohibitions on e-cigarette advertisements, and prominent e-cig companies such as Blu and GreenSmoke have taken full advantage of marketing leeway. And while Capitol Hill has taken a strong stance on regulating e-cigarettes as strictly as regular “combustible” cigarettes, the largest tobacco companies have already adhered to many of the FDA’s suggested rules in anticipation of a crackdown.

The Companies Behind the Smoke and Mirrors

The most recognizable cigarette conglomerates own the most popular names in the e-cigarette business. Well-versed in federal regulatory policies, these massive companies are far ahead of smaller e-cig competitors.

Their profits are thus unlikely to be affected by the U.S. Senate and the FDA’s distaste for “vaping.” Altria Group ($MO, formerly Philip Morris) acquired top-rated GreenSmoke in February for $110 million in cash, offering up to $20 million in incentive payments. Lorillard Inc. (LO) owns Blu, which accounts for almost half of all e-cigarette sales. Reynolds American Inc. (RAI) stated Tuesday that all 50 states would be carrying its Vuse brand of electronic cigarettes starting June 23.

Shares in all cigarette companies are up and have been steadily climbing over the past six months except, interestingly, Vapor Corp (VPCO) . New to NASDAQ, Vapor Corp. began trading on May 30, 2014 and specializes in electronic cigarettes and their accessories. News of the federal crackdown on vaporizers may be to blame for Thursday’s slight 0.56 percent drop in VPCO value.

Big Government vs. Big Tobacco: the Battle over Minors

U.S. Senators are not buying the claims that e-cig companies large and small are not directly targeting kids. With flavors such as popsicle, cotton candy and gummy bear, e-cigarette manufacturers got fierce heat from Sen. Barbara Boxer (D-CA), who made it clear to industry witnesses that she and her fellow senators were “seeing a repeat, and we here in this committee” would not be fooled.The FDA banned flavored combustible cigarettes in Sept. 2009 in an attempt to break the companies’ appeal to minors. If electronic cigarettes enter the realm of FDA tobacco regulation, any cartridges other than basic menthol and tobacco flavors may also be banned.\

However, the FDA did not outright endorse a flavor ban, nor did they propose any bans on advertising or internet-based sales. Their suggestions are currently limited to bans on sales to minors, free samples, vending machine sales in any venue open to minors and regulated disclosure of all ingredients in flavor cartridges.

Electronic Smoking: Healthy?

E-cigarettes deliver nicotine to smokers through a vapor, rather than through tar and smoke as “combustible” cigarettes do. E-cig marketers have held on to the notion that vaporized nicotine is a healthier, or rather, less-unhealthy option for current smokers as well as those considering picking up the habit.

However, the FDA’s proposal highlights one 2013 study,which“found that toxic chemicals such as formaldehyde and acetaldehyde were detected in the cartridges as well as the aerosol from certain e-cigarette nicotine solutions.”

The same document states that in February 2014, 41.7 percent of the combined calls to poison control centers for conventional cigarettes and e-cigarettes were for e-cigarette exposures. In addition, 51.1 percent of those exposures were for children aged 0 to 5 years.

New York made a clear move toward giving electronic and combustible cigarettes equal treatment, banning public e-cig use in April 2014. Mayor Bloomberg went so far as to amend the 2002 Smoke-Free Air Act to include the e-cig ban. Nearly 200 other counties across the US have followed suit.

GreenSmoke is currently the highest-rated electronic cigarette brand. A conversation with an online customer service representative revealed that long-lasting batteries are the primary reason for their position “at the higher end of the electronic cigarette industry.” The rep shared that 15 puffs is the equivalent to one cigarette, and one GreenSmoke flavor cartridge holds the same amount of nicotine in about 20 cigarettes. However, there is no moderating technology within the cigarette to alert users when they have inhaled the amount of vaporized nicotine present in one cigarette. E-cigarette users can thus conceivably smoke the equivalent of 20 combustible cigarettes in one sitting; for adolescents interested more in the flavor than the nicotine buzz, unmeasured smoking is made easy by these long-lasting e-cig batteries.

Despite Fuming Opponents, the E-Cig Industry Remains Lit

Investors who feel comfortable with including Big Tobacco in their portfolios can rest assured that the recent FDA scrutiny is unlikely to affect e-cig profits in the near future. As with all government procedures, regulations will take time to go into effect, and the largest e-cig brands already follow many of the proposed rules regarding labeling and age restrictions.

It will, however, present a hurdle that new competitors must overcome prior to entry into the growing market. Their loss may be Big Tobacco’s gain, giving the largest e-cig manufacturers time to capture huge swaths of current and future smokers.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
RAI Reynolds American Inc 54.68 0.72 1.33 5,259,711
MO Altria Group Inc. 63.99 1.10 1.75 7,634,987
VPCO Vapor Corp 0.00 0.00 0.00 32,847,304
MARUF Marubeni Corp. 4.95 0.00 0.00 0

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