E-Cigarettes Want Your Attention Now (Before the FDA Steps In)

From: Bloomberg/BusinessWeek

By Justin Bachman

The electronic cigarette is about to have its turn in the spotlight. The battery-powered gadgets transform nicotine and other substances into an inhaled vapor and have been marketed as a safer alternative to tobacco smoke, which is drawn into the lungs and increases cancer risks. The rapidly growing e-cigarette business—expected to top $1 billion in annual sales in the next few years—is racing to command a bigger share of spending among smokers and potential smokers ahead of possible regulations from the U.S. Food and Drug Administration.

NJOY, a Phoenix-area company with the largest share of the market (about 36 percent), announced a $75 million investment today. Its newest backers include Napster founder and former Facebook (FB) President Sean Parker and Homewood Capital, an investment fund run by Douglas Teitelbaum, who’s joining the board of NJOY, which was founded seven years ago by tobacco-industry veterans. “I’m optimistic that the clever application of technology might someday obsolete the combustion cigarette and all the harm it causes,” Parker said in a statement. His philanthropic foundation also donates money toward cancer research.

Altria Group (MO), the parent of Philip Morris, the largest U.S. tobacco company, is expected to announce its entry into the increasingly crowded market during an investor event on Tuesday. Last week, R.J. Reynolds (RAI) rolled out its Vuse Digital Vapor cigarette in metro Denver with plans to expand the product nationally. The current No. 2 brand, Blu eCigs, which Lorillard (LO) acquired last year for $135 million, today announced its sponsorship of the 2013 Bonnaroo Music & Arts Festival this coming weekend, where it will have an air-conditioned Vapor Lounge “activation space” for those over 18. (IDs will be checked at the door, the company and Bonnaroo officials said in a news release.)

The FDA doesn’t regulate e-cigarettes—at least for now—but the potential of future marketing curbs has the nascent industry angling for smokers’ attention, whether at a huge music festival like Bonnaroo or with a commercial showing a baby doing the Gangnam Style dance to promote a U.K. brand. “Although e-cigarette companies may not have the marketing budget of a big tobacco company, they are somewhat less encumbered (for now) in communicating to consumers,” Wells Fargo Securities (WFC) tobacco analyst Bonnie Herzog wrote in an August 2012 note, predicting sales could top traditional cigarettes in the next decade and urging big tobacco firms “to wake up” to the market’s potential.

In an interview with the Wall Street Journal published today, Mitch Zeller, director of the FDA’s Center for Tobacco Products, described the e-cigarette market as “the wild, wild West” regarding the lack of government oversight but did not say when regulations would be proposed. It’s already clear the agency isn’t exactly thrilled with the public health attributes of e-cigarettes, based on the language used on its website:

“As the safety and efficacy of e-cigarettes have not been fully studied, consumers of e-cigarette products currently have no way of knowing whether e-cigarettes are safe for their intended use, how much nicotine or other potentially harmful chemicals are being inhaled during use, or if there are any benefits associated with using these products. Additionally, it is not known if e-cigarettes may lead young people to try other tobacco products, including conventional cigarettes, which are known to cause disease and lead to premature death.”

Beyond the nicotine, one of the major ingredients in most electronic cigarettes is propylene glycol, which isn’t considered toxic for humans but is also found in antifreeze and de-icing fluid. (Blu eCigs notes on its home page that its products don’t contain the chemical.) Former smokers can be found online trading comments on the relative merits of one brand over another, with taste and the ability to replicate smoking as paramount priorities for their selections.

“The most amazing thing about this cigarette? It isn’t one,” NJOY says in promotional language on its website. At the FDA, that distinction may not be enough to ward off the kinds of regulations that could restrict e-cigarette advertising to the limited precincts its traditional tobacco-made cousins now inhabit.

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