Children Using e-Cigarettes Are More at Risk of Trying Cigarettes

Children using e-cigarettes like Lorillard's (NYSE: LO.DL  ) Blu are twice as likely to try traditional cigarettes made by Lorillard, Reynolds (NYSE: RAI  ) , and Altria Group (NYSE: MO  ) than those who have never tried an e-cigarette.

According to the Centers for Disease Control, 43.9% of non-smoking youth that have tried e-cigarettes report an intention to smoke a conventional cigarette within the coming year, versus just 21.5% of those that have never tried an e-cigarette.

That's worrisome given that reducing spending on healthcare treatment for tobacco users remains a major focus of policymakers and healthcare payers.

Source: Lorillard.

Teen use climbing
The Centers for Disease Control conducts its National Youth Tobacco survey of middle and high school students in a bid to gauge tobacco's appeal to teens and handicap future tobacco use.

According to the CDC study, more than 250,000 children smoked e-cigarettes last year, up from 79,000 in 2011. The increase in e-cigarette vaping and the growing number of teens interested in smoking conventional cigarettes suggests that e-cigarettes, which were initially launched as devices to help curb smoking, may actually lead to more, rather than less, tobacco use.

Rising teen use of e-cigarettes reflects the market's general embrace of vapor nicotine devices. Over the past few years, sales of e-cigarettes have soared from hundreds of millions of dollars to nearly $2 billion, and analysts estimate that sales of e-cigarettes may total $10 billion by 2017. Some analysts even predict that e-cigarette sales could someday outpace those of traditional cigarettes.

On the bandwagon
E-cigarettes growth and the corresponding risk to conventional cigarette revenue has caught the attention of major cigarette companies including Lorillard, Reynolds, and Philip Morris, which are moving quickly to control the market.

Source: Reynolds

Lorillard has been the biggest and most aggressive e-cigarette manufacturer. The company acquired Blu, the nation's top-selling brand, with roughly 40% market share, back in 2009 for $135 million and has rolled the Blu brand out nationally in a bid to garner first-to-market sales benefits. As a result, sales of Blu totaled $37 million in the second quarter.

Reynolds and Philip Morris have been a bit more cautious, but have since embraced their own e-cigarette brands in order to take advantage of rising demand and ostensibly build brand loyalty.

In February, Altria announced a $110 million acquisition of Green Smoke, which will complement its MarkTen brand. And Reynold's is rolling out its own Vuse brand in more markets even as it buys Lorillard in a $27 billion deal that will result in Blu being sold to Imperial Tobacco.

Regulations are coming
Nicotine has long been associated with health risk, including a reduction in brain development and function. Nicotine is highly addictive, and evidence shows that despite intentions to quit, three of every four teen smokers end up becoming adult smokers.

That suggests that government's focus on reducing youth smoking is on target.

In April, the FDA proposed regulations for e-cigarettes, including registration of products and ingredients, halting the distribution of free samples, and minimum age restrictions for sales. While the regulations initially focus on these areas, it's not a stretch to assume that regulations will spread to include advertising and flavors like Java Jolt, too.

The CDC's study found that children that have seen or heard tobacco ads have a higher interest in smoking than those who haven't, and that the more exposed teens are to advertising, the more likely they are to pick up the habit.

Among those exposed to ads, 25.6% of those seeing or hearing at least three to four ads intended to smoke in the coming year, while just 13% of students without exposure reported an interest in smoking.

The cost of care
The Surgeon General's office has been tracking the economic and societal impacts of smoking for 50 years, and efforts to curb tobacco use have been mostly successful.

According to the Surgeon General, smoking kills almost 500,000 Americans every year, and more than 20 million Americans have prematurely died over the past 50 years because of smoking. That number is likely to climb given that more than 16 million Americans are currently living with some form of smoking-related disease.

As a result, treating diseases caused at least in part from smoking costs $132 billion annually; creating a significant headwind for public healthcare programs like Medicare and Medicaid.

Fool-worthy final thoughts
The Surgeon General reports that more than 3,000 American youths smoke their first cigarette every day. That's a troubling statistic given how many young smokers turn into adult smokers.

So far, tobacco companies have had free reign in establishing e-cigarettes in the marketplace, but that freedom appears to be coming to an end. As the industry gets more competitive, consolidation is likely, but that doesn't mean access to e-cigarettes will shrink. If policymakers and healthcare payers hope to prevent e-cigarettes from leading to traditional cigarette smoking, they'll need to increase their scrutiny of the industry in the coming years.

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  • Report this Comment On August 31, 2014, at 12:05 PM, joker831 wrote:

    The 'cigalikes' put out by Big Tobacco are designed to do one thing only..... to make smokers NOT want to quit. I quit a 35 year two pack a day tobacco habit by switching to vaping. It saved my life. This article is nothing but pure propaganda put out by Big Tobacco. Young people today are a lot smarter than what they were 30 or 40 years ago. Smoking is a social activity. Young people today are not going to try ecigs as a gateway to something that they KNOW for a fact will kill them or cause serious health issues. Most young people tend to vape at zero nicotine. I started at 12 milligrams. I'm now at 6 and expect to be at zero by the end of 2014. So, no, vaping is NOT a gateway to tobacco use. That is just an out right lie. Big Tobacco, The FDA and the CDC are terrified at the thought of losing billions of dollars in revenue, bribes and taxes. They will say anything to save their profits. My cost to vape is one fifth of what I used to spend on traditional tobacco. Since I started, I do not have a craving for tobacco. No withdrawl symptoms. My breath, hair and clothes no longer smell like an ashtray. My sense of smell and taste have returned. I feel better and have more energy. I started riding my bike back and forth to work. That's an 8 mile round trip. All of the negative press and attention is put out by Big Tobacco. They had their chance to give the public a safer and healthier alternative. They blew it because they realized there was no profit in it. So they decided to continue to profit from the half million people that die each year from smoking and related issues. Make no mistake..... this whole ecig/vaping thing is NOT about public health. It's about money. Period. Plain and simple. Big Pharma, Big Tobacco, the FDA and the CDC can't profit if people start becoming healthy. They all could care less about what people consume. As long as it doesn't interfere with their profits of course. That's a fact. The claim that 'flavored' eliquid targets kids is ridiculous. If that truly were the case then alcohol manufacturers would be suffering severe losses from all their 'flavored' booze. You just can't target 'flavors' in one industry. That just doesn't make any sense at all. That's why that argument is only for fools and people with single digit I.Q's. If you really want to quit tobacco, try a battery and tank system. Vaping gives the user total control over every single aspect of it. You control the nicotine level. Use zero if you want. You control what flavor you use. You decide how many or how few puffs you want to take. DO NOT buy eliquid from another country. You have no idea what's in it. I make my own. My cost to make it is between 5 to 8 cents per milliliter. If you buy it retail in any vape shop or online, then you are paying 50 to 85 cents per milliliter. Do the math. I only use components made in the US. Medical Grade Nicotine, USP Food Grade propylene glycol, USP Food Grade vegetable glycerin, and USP Food Grade flavors. I do not use anything made in another country. That is where the problems start. Vaping saved my life. It also saved me a LOT of money. And I feel better. Smoking is dead. Vaping IS the future. And the future is NOW.

  • Report this Comment On August 31, 2014, at 12:34 PM, notyouagain wrote:

    I second joker.

    Almost three years ago I switched to ecigs. They are so effective that even if I happen to run out of cartridges and bum a few real cigarettes until I can get more ecigs, I go right back to the ecigs no problem whatsoever, without missing the real ones at all.

    That's only happened a couple times, but it's nice to know. If someone wanted to bet me I couldn't have just one thinking it would restart my tobacco habit, it would be easy money for me.

    I'm much healthier, I walk a couple miles a day.

    There will always be kids who will try smoking. Thanks to ecigs, many of them WON'T want to try real cigarettes. What about them?

    If there were no ecigs, the ones who try smoking would ALL get hooked on real cigarettes.

    This whole argument is stupid.

    They're cheaper and healthier. Big Tobacco better get in the game, because more people are switching every day now. They don't need to advertise when they have people whose lives have been changed like joker and myself.

    You nonsmokers out there with an attitude because either you just hate smoking or you lost someone in your family to cancer might consider this: perhaps your loved one would still be here if ecigs had been here for them.

  • Report this Comment On September 04, 2014, at 8:27 AM, sparksinchitown wrote:

    They are also more likely to drink, smoke weed, eat molly, engage in teen sex and get tattoo's. You need a study to realize that???

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Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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