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Electronic Cigarettes Have a Rich and Powerful Enemy

By Rupert Hargreaves – Jan 10, 2014 at 6:53AM

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Electronic-cigarette devices, such as those currently being sold by Altria and Philip Morris, are hurting profits of a very powerful industry, and things could get messy.

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 (PM 0.87%), Altria Group (MO -1.42%), 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 (GSK 0.48%) 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. 

Fool contributor Rupert Hargreaves owns shares of Altria Group. The Motley Fool owns shares of Philip Morris International. 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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