Will New Regulations on E-Cigs Hurt Big Tobacco?

New regulatory proposals on tobacco questionable on both passage and impact

May 10, 2014 at 10:00AM

The FDA caused quite the stir when it announced its proposal to regulate e-cigarettes last month.

The proposals would require e-cigarette makers to: "Register with the FDA and report product and ingredient listings; Only market new tobacco products after FDA review; Only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the product will benefit public health as a whole; and Not distribute free samples."

The rule also included minimum age restrictions, requirements to include health warnings and prohibition of vending machine sales .

Does it matter?
From a public health standpoint, the new regulations are a step forward. However, it's questionable how much this will really affect sales, especially if it will be enough to impact the Big Tobacco triumvirate: Altria (NYSE:MO), Reynolds American (NYSE:RAI), and Lorillard (NYSE:LO). Lorillard, owner of blu eCigs and SKYCIG, was one of the first adopters of e-cigarettes and has almost half of the market share at convenience stores. Reynolds' Vuse and Altria's MarkTen are both expected for national rollout this summer.

Several of the new rules are just codifying existing policy. Requiring the FDA to confirm scientific claims is basically status quo – companies are already unable to market e-cigarettes as a smoking cessation method. Nonetheless, the multiple studies have shown benefit in assistance to quitting, and Addiction's 2011 survey of 3,587 US e-cigarettes users indicate 92% to 96% reported e-cigarette assistance in quitting or reducing smoking. In other words, regardless of the "official" scientific evidence, word of mouth, physician suggestion and anecdotal proof still promote what the companies are unable to officially market.

Similarly, minimum age restrictions were already in place in 33 states and were probably an inevitable trend regardless of federal government involvement. Notably, some states may propose even stricter rules than the FDA's regulations.

As for the required health warnings and prohibition of vending machine sales; as many e-cigarette users may be current cigarette smokers, neither of those propositions are ground-breaking for those accustomed to the rules of traditional cigarettes. Addiction's survey also revealed 70% of e-cigarette users were former smokers. While 84% reported that the perception that e-cigarettes are less toxic than tobacco was a reason for using e-cigarettes, 79% also reported they used e-cigarettes to deal with cravings and 67% reported improvement of withdrawal symptoms. The health warnings may hinder the perception of decreased toxicity, but won't touch the empirical experience of diminished cravings and withdrawal.

One of the bigger changes from status quo is the ban on distribution of free samples. While a higher initial investment in purchasing an e-cigarette could be solved with a free sample, 57% of surveyed users actually reported that e-cigarettes were cheaper for them than cigarette use. This ban may affect the acquisition of new customers, but the FDA is not addressing other marketing restrictions like TV, radio, billboards, or sponsorships which is a huge win for e-cigarette marketers (including tobacco companies).

Flavors, which have previously been cited as potentially targeting adolescents and women, are not banned -- so any targeting by e-cigarette makers can continue.

Bottom line
The FDA made moves to regulate e-cigarettes, but the proposals are not rule of law yet. Science is still equivocal on the health benefits and/or risks and many health care providers already include e-cigarettes in their repertoire of smoking cessation tools despite a lack of conclusive evidence. As such, this is not as clear-cut of a public health battle as that of traditional cigarettes.

Nonetheless, I believe that the e-cigarette industry certainly can only lose in this scenario, and Lorillard is at the biggest risk as its brand blu eCigs has about half of the e-cigarette market. Nonetheless, e-cigarettes represented just $49 million of last quarter's $1.6 billion top line, or about 3%. By no means will tobacco companies welcome more regulations, but also by no means will it be particularly devastating for them even if regulations do come out in full force.  

Looking for dividend stocks with fewer question marks?
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Amy Ho has no position in any stocks mentioned, and neither does The Motley Fool. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers