A New Study Has the Potential to Kill the E-Cigarette Market

A new study has linked e-cig use to higher youth smoking rates, and this is a problem for Altria, Reynolds American, and Lorillard.

Mar 22, 2014 at 10:00AM

Anyone who has been watching the electronic-cigarette, or e-cig, debate knows that a key argument used to support possible regulation is the belief that e-cigs normalize, or encourage, the action of smoking. As of yet, this has been nothing but hot air from health campaigners and government agencies. But a new study has released groundbreaking data showing that there is in fact a link between the use of e-cigs and traditional cigarettes among US adolescents.

For tobacco companies like Altria Group (NYSE:MO), Lorillard (NYSE:LO), Reynolds American (NYSE:RAI), and Philip Morris International (NYSE:PM), this conclusion is -- in a word -- disastrous. 

Groundbreaking study
JAMA Pediatrics is the oldest continuously published pediatric medical journal within the United States, founded in 1911. According to one of the journal's studies, adolescents who have or are using e-cigs are less likely to have given up smoking than those who did not use e-cigarettes. The authors of this study are Lauren Dutra and Stanton Glantz, two prominent opponent of e-cigs; this does bring into question the bias of the study, although there is no denying that the process wasn't thorough. The study relied upon data from 40,000 adolescents who completed surveys carried out by the Centers for Disease Control and Prevention. Overall, the authors concluded that:

...[the] use of e-cigarettes does not discourage, and may encourage, conventional cigarette use among U.S. adolescents.

Still, critics say that while the study does show a correlation between smoking and e-cig use, there is no evidence to show that the use of e-cigs will directly lead to smoking. Unfortunately, this study comes at a time when the U.S. Food and Drug Administration is preparing regulations and controls for the juvenile e-cig market within the United States.

Starting to apply pressure
At present, e-cigs are for the most part unregulated, allowing companies to aggressively market them and claim that e-cigs are relatively safe. This approach can't be used with conventional cigarettes. However, opposition to e-cigs is building, and an unlikely backer is funding the move against these reduced-risk products.

Indeed, one of the biggest forces 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; 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, GlaxoSmithKline will lose revenue. It's likely that big pharma could use this study to increase pressure on the FDA to regulate e-cigs.

Furthermore, it would also seem as if GlaxoSmithKline 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.

Thought of as a good thing
On the other hand, there is an enormous amount of support for e-cigs. Throughout November and December, more than 35 organizations, including public health advocates, lawyers, and physician groups, petitioned Washington, D.C.'s Office of Management and Budget. They lobbied to stop a rule which would bring e-cigs under the control of the FDA (this rule was proposed by the FDA).

If e-cigs were brought under the control of the FDA, the administration could potentially require companies to implement a host of protocols, including: register and pay fees, list the ingredients in their products, obtain prior approval for new products, and restrict online sales and marketing to children.

The OMB has not had a meeting over the matter since Jan. 17, so it is likely that an outcome is due to occur in the near future.

Future under threat
Obviously, this threat from the FDA is a huge risk to the young e-cig market within the US; therefore, Lorillard and Altria have made moves to diversify while the going is good.

Specifically, Altria recently purchased Green Smoke, an international e-cig company with a distribution network and sales in the US and Israel. Meanwhile, Lorillard has acquired a British e-cig developer, although this does mean the company must compete with tobacco industry behemoth British American Tobacco, which has launched its first e-cig product in its home market.

In addition, Altria and Reynolds have made inroads in the NRT market within the US, both offering types of tobacco gum. Reynolds also has several smokeless snuff offerings, which are still registering strong demand. This is nothing new; it just helps set the company apart from its peers.

As a result, all will not be lost for these companies if the FDA moves against them. Smaller e-cig companies, however, could potentially be snuffed out overnight, as regulations benefit the industry's larger players.

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Rupert Hargreaves owns shares of Altria Group. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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