The E-Cigarette Revolution

Richard Craver, a writer for the Winston-Salem Journal, recently described the growing popularity of e-cigarettes (here).  Bonnie Herzog, a Wells Fargo security analyst who has followed the tobacco industry for many years, described e-cigarettes as “here to stay,” suggesting that sales would reach $1 billion within a few years.  In an August research note to investors (here), Herzog predicted that e-cigarette sales could surpass combustible cigarettes within ten years.

These predictions are based on impressive increases in e-cigarette sales since 2008.  The chart illustrates UBS data presented by NJOY CEO Craig Weiss during a conference call with Goldman Sachs on December 14.  U.S. e-cigarette sales totaled $20 million in 2008; they have doubled each subsequent year, to $500 million in 2012.  As Weiss noted, the explosive growth occurred even as the category was inundated with low-quality products that provided a suboptimal experience to smokers.  That problem is being resolved by substantial investment in quality improvement.  NJOY, which has a 40% share of convenience store e-cigarette sales, introduced King (here), describing it as “the first electronic cigarette with the look, feel and flavor of the real thing.”

 

Product improvements can be expected because cigarette manufacturers are also investing in the category.  In April, Lorillard purchased Blu (here), and Craver reports that the company has invested $40 million in a marketing campaign.  In July, Craver reported that RJ Reynolds launched e-cigarette Vuse in limited test markets in Virginia and North Carolina (here). 

British American Tobacco announced on December 19 that it had purchased CN Creative (here).  This company makes the Intellicig e-cigarette brand (here) and Ecopure nicotine solution (here), which it says is produced with pharmaceutical- and food-grade products and undergoes stringent testing.  BAT also owns Nicoventures (here), a company devoted to providing “…a new choice to smokers looking for a safer alternative to cigarettes.  Nicoventures will focus exclusively on the development and commercialization of innovative regulatory approved nicotine products that provide a consumer-acceptable alternative to cigarettes without the serious risk to health of smoking.  We want to explore the development of innovative nicotine products that, subject to regulatory approval, will provide smokers with an alternative to cigarettes and a product they actually want to use.”

Wells Fargo’s Herzog also notes that the steep decline in cigarette consumption will affect state payments from the 1998 Master Settlement Agreement.  While cigarette manufacturers promised to pay the 46 MSA states about $206 billion over more than 20 years, their payments will be reduced if cigarette sales decline.  This could lead state governments to impose excise taxes on e-cigarettes to cover those losses. 

So far, e-cigarettes have avoided excise taxes because they are not classified as tobacco products.  However, in 2011, federal courts ruled that e-cigarettes are tobacco products (here), so the “excise tax honeymoon” that e-cigarettes and their users have enjoyed won’t last forever.    

The tobacco harm reduction revolution is unstoppable, and e-cigarettes are poised to play a major role.  State legislators can facilitate smokers’ switch to healthier e-cigarettes by keeping excise taxes low, or nonexistent.

Kudos to the FDA: E-Cigarettes Are Tobacco Products

On April 25, the FDA abandoned its claim that e-cigarettes are drug delivery devices. In an open letter published on the agency’s website (here), Tobacco Center Director Lawrence Deyton and Drug Center Director Janet Woodcock acknowledged that e-cigarettes are tobacco products and would be subject to regulations under the 2009 Tobacco Act. This is consistent with the January 2010 decision by federal judge Richard Leon (discussed here).

This is a victory on several counts for smokers and for our nation’s public health. First, the FDA decision guarantees that e-cigarettes, which have helped many smokers quit, will remain on the market.

Second, as the Deyton-Woodcock letter indicates, FDA regulation of e-cigarettes will subject them “to general controls, such as registration, product listing, ingredient listing, good manufacturing practice requirements, user fees for certain products, and the adulteration and misbranding provisions, as well as to the premarket review requirements for ‘new tobacco products’ and ‘modified risk tobacco products.’” These requirements will promote the marketing of safe and quality-controlled products.

Finally, this decision could allow pharmaceutical companies to reposition nicotine medicines as recreational alternatives to cigarettes. Today, these products are sold with a therapeutic claim for smoking cessation, but they are expensive, unsatisfying and FDA-approved only for temporary use (10-12 weeks). That accounts for their dismal success rate of only seven percent among smokers (evidence here). I believe pharmaceutical companies should enter the recreational nicotine market with products that satisfy smokers indefinitely and are cheap enough to compete directly with cigarettes. Clearly, the tobacco industry is poised to compete in this new market -- Reynolds American owns Niconovum (here) and British American Tobacco recently formed Nicoventures (here).

In my 1995 book “For Smokers Only” (description here), I shared my perspective on recreational nicotine for smokers:

“Smokers derive a lot of pleasure from smoking tobacco. You may be reading this book because you or your loved one actually enjoys lighting up a cigarette and taking several deep puffs. A smoke may be especially welcome when you are in a stressful situation or when you need to relax. Or you may enjoy smoking when you need to concentrate on a difficult problem at work or at home. Cigarette smoking can activate that mental pressure-relief valve, which is followed by the feeling that the problem can be solved, the crisis will pass. These feelings are real, and not just a figment of your imagination.

“Many tobacco opponents claim that these sensations are not truly pleasurable, but are merely the satisfying of induced cravings and avoidance of withdrawal symptoms. One of the big advantages of the smokeless tobacco solution is that it addresses either view of smoking equally well. That is, it doesn't matter if you are a smoker who is unwilling to quit because you enjoy tobacco, or if you are unable to quit because of nicotine craving and withdrawal. Because in either case you recognize the potential life-shortening effects of this nicotine delivery system. In either case the smokeless tobacco solution can work for you.”

Smoking has been the problem; smoke-free tobacco and nicotine can be the solution. In making the right call on e-cigarettes, the FDA has facilitated that solution.