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Electronic Cigarettes Have a Rich and Powerful Enemy

Electronic cigarettes have been one of the most disruptive technologies to hit the tobacco sector in recent years. The market for them has grown rapidly, and many smokers are now switching to the electronic cigarette, or e-cig, over traditional, more harmful cigarettes. This rise to fame within the smoking community has sent tobacco players such as Philip Morris International (NYSE: PM  ) , Altria Group (NYSE: MO  ) , Reynolds American, and Lorillard into a sort of e-cig arms race.

E-cigs are for the most part unregulated, allowing companies to aggressively market these products and claim that they are relatively safe, something they cannot do with conventional cigarettes. However, opposition to e-cigs is building, and an unlikely backer is funding the move against these reduced risk products.

Foul play
The force working against the introduction of e-cigs is big pharma. Now, this will come as no surprise to some: big pharma profits from treating disease, including diseases stemming from smoking; if there is less disease to treat, then their profits will fall, which is bad news for shareholders.

In addition, big pharma is highly active in the nicotine-replacement therapy, or NRT, market. NRT includes such items as nicotine gum, lozenges, and patches, and GlaxoSmithKline (NYSE: GSK  ) is the leading marketer of these products within the United States. Obviously, if smokers who are in the process of quitting turn to e-cigs rather than NRT, Glaxo will lose revenue.

Unfortunately, it would also seem as if Glaxo has support from the U.S. Food and Drug Administration; in particular, Mitch Zeller, a former anti-tobacco lobbyist who was appointed head of the FDA's center for tobacco products earlier this year. Now, Zeller should not be taking sides in this argument, but according to an article published in The Wall Street Journal back in 2009, Zeller disclosed that he "...provides consulting support to GlaxoSmithKline consumer health through Pinney Associates on an exclusive basis on issues related to tobacco dependence treatment."

This pharmaceutical consultancy has regulatory authority over competing products, including e-cigs.

Across the pond
Meanwhile, the e-cig industry is facing pressure in Europe. Fortunately, a movement to outlaw e-cigs in their current form has been thrown out by the European Parliament. Nevertheless, a new negotiating document drafted by the European Commission seeks to overturn this decision. Brussels officials fear that there is a "risk that electronic cigarettes can develop into a gateway to normal cigarettes." This could be a huge setback for the industry within Europe.

Working together
Obviously, this is going to affect Philip Morris' most recent push into e-cigs. Philip Morris recently partnered with Altria, announcing that the two companies will share the technology for electronic cigarettes and 'reduced-risk' products under several licensing, supply, and cooperation agreements.

Under the terms of this technology-sharing deal, Altria will make its e-cigarette products available exclusively to Philip Morris for commercialization outside of the United States. In exchange, Philip Morris will make two of its reduced-risk tobacco products available for Altria to market within the US.

This is actually a great deal for both companies. You see, to some extent Philip Morris, although a leader of the tobacco world, has gotten things wrong; the company has not taken the rise of the e-cig seriously. Specifically, while peers like Altria have had e-cig products under development for months, Philip Morris only announced its intent to enter the market in November of 2013. As a result, Philip Morris has found itself lagging the field when it comes to e-cig technology.

That said, Altria itself has not been proactive in getting its product to market and has only just expanded its e-cig offering in a second state; Altria initially released its offering into 3,000 retail stores within Indiana, and it has since expanded into Arizona. However, Altria has not released sales figures for its product within Indiana, which could be a bad thing.

Foolish summary
All in all, the new e-cig industry is rife with speculation and foul play. With politicians, regulators, and pharmaceutical companies all attacking the industry, which is in its infancy, things could be about to get very messy.

Still, Philip Morris and Altria appear to be in the best position to ride out this volatility. These two tobacco behemoths are sharing technology, and any e-cig revenue is only likely to make up a small percentage of their overall income, so any regulation is unlikely to significantly impact their bottom line. 

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Read/Post Comments (7) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2014, at 7:35 PM, TexasBob86 wrote:

    I've been using e-cigs for three years and have been following the business.

    I haven't smoked a tobacco cig for two months. I no longer desire them. Having said that. The e-cig retailers have been scrupulous about NOT promoting their products for smoking cessation.

    What is troubling is that so many people are calling for e-cigs to be banned before there is any evidence that would justify such a ban. It seems, we've completely lost the meaning of "freedom".

  • Report this Comment On January 10, 2014, at 9:50 PM, stuffing wrote:

    ahh yes...profits, not health. why even call it the "healthcare industry"?

    it's the "moneycare industry" ! and it sucks. if the people who profit off of others illnesses would all die, this stupid world would be much better off.

  • Report this Comment On January 11, 2014, at 8:58 AM, Matthewuwf wrote:

    The "rich and powerful enemy" of e-cigs which, in time, will be completely dominated by current tobacco companies is big pharma? The tobacco giants would without a doubt rather continue to sell traditional cigarettes opposed to ecigs when you look at the product margins. And to think that ecigs could be regulated anywhere near the degree of traditional cigarettes (which still isnt very high) is hard to believe. Lawmakers wont have the time to even listen to the pharma lobbyist on this one. They will be too busy trying to figure out a way to tax them as tabacco products.

  • Report this Comment On January 11, 2014, at 11:40 AM, Chirpee wrote:

    I have been smoking an e-cig for my second year. I haven't smoked a tobacco cigarette in that same time. I find I am better am to not smoke at all if I chose or am in a situation where I must abstain. The federal government, tobacco companies and pharma companies are only concerned with the profits margins! Why doesn't someone worry about getting the toxic and chemical filled tobacco cigarettes abolished completely. The are more harmful than an e-cig, yet they aren't rally to stop them. Big Pharma is only making noise because they will lose their profits from people who develop diseases from smoking tobacco cigarettes!

  • Report this Comment On January 11, 2014, at 12:35 PM, Rojeans wrote:

    E-cigarettes are, as we know them, under threat for all the reasons you say.

    There will be an 'e-cig-gate' when the alleged brown envelopes are traced right to the very top.

    This is going to be one very large revolution and I, as a vaper, am in the thick of it and fighting for my right to vape what I want, where I want, when I want..

    Great article BTW, thanks.

  • Report this Comment On January 11, 2014, at 2:41 PM, Dragonmum wrote:

    UK are in the forefront right now and we're up for a fight. There is an inevitability about the success of the e-cig that some country will take advantage of very soon. No government gives a cuss about Public Health - on the contrary, with an ageing population they can't see us into our boxes fast enough - but they all care about economic growth and there is massive potential in e-cigs.

  • Report this Comment On January 11, 2014, at 8:50 PM, Disgustedman wrote:

    I quit in May, 2013. Smoke free for 7 months so far. My sister hates that, she's still addicted.

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Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

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