E-cigarettes are taking the smoking country by storm, but not everyone is thrilled about it. The American Heart Association raised concerns about the devices in a policy statement released on Monday. The influential group says e-cigarettes threaten to renormalize tobacco use and hook a new generation on nicotine. The association's stance could deliver a huge blow to the e-cigarette market if regulators devise policy based on its recommendations. This could have implications for shareholders of Altria Group (NYSE:MO), Reynolds American (NYSE:RAI), and Imperial Tobacco (OTC:IMBB.Y).
American Heart Association says 'no' to e-cigarettes
The American Heart Association, or AHA, acknowledges that e-cigarettes might play a role in helping people quit smoking, but is reluctant to encourage wider use of the devices without further study. "People need to know that e-cigarettes are unregulated and there are many variables that we don't know about them," said Aruni Bhatnagar, Ph.D., the professor who led the team that wrote the AHA's policy statement.
The AHA has long been opposed to tobacco use because it increases the risk of cardiovascular disease, among other unhealthy effects. However, e-cigarettes do not contain tobacco. Instead, users inhale vaporized nicotine as an aerosol. This delivery method is thought to be safer than burning tobacco, but conclusive studies have yet to be published.
Still, the AHA fears that nicotine's addictiveness could create another generation of smokers. "Recent studies raise concerns that e-cigarettes may be a gateway to traditional tobacco products for the nation's youth, and could renormalize smoking in our society," said AHA CEO Nancy Brown. Moreover, one study found that e-cigarettes are not effective smoking cessation devices. For these reasons, the AHA says e-cigarettes should be subject to the same restrictions as combustible cigarettes.
Urges regulators to treat as tobacco product
The Food and Drug Administration, or FDA, already considers e-cigarettes to be tobacco products, but the battery-powered devices are still largely unregulated. E-cigarettes face relatively few marketing restrictions and are not yet taxed like combustible cigarettes. Along with strong consumer interest, lax regulation has allowed the e-cigarette market to blossom into a $2 billion industry in the U.S.
The AHA hopes to put an end to e-cigarette growth by restricting advertising, flavors, and online sales in an effort to curb consumption by teenagers and young adults. If the FDA implements the AHA's recommendations, the e-cigarette market could go up in smoke.
How tobacco companies are affected
Each of the big three tobacco companies is expected to have a strong presence in the e-cigarette market in the years ahead. Altria and Reynolds American began rolling out their respective e-cigarette brands nationwide at the start of the summer, while Lorillard's (NYSE: LO) blu eCigs will be transferred to Imperial Tobacco when the former is acquired by Reynolds American.
The current regulatory environment gives big tobacco companies a huge advantage in the e-cigarette market. Given each company's massive cash flows relative to the capital expenditures required to maintain combustible cigarette operations, Altria, Reynolds American, and Imperial Tobacco have more money to spend on e-cigarette advertising than most other players in the market. As a result, they should be expected to wrest control of the market in the coming years absent policy changes.
Big tobacco's e-cigarette growth would be stunted if the AHA's recommendations were to be implemented. It would be difficult to create differentiation in the market without the ability to freely advertise and offer candy-flavored devices.
However, these restrictions would likely stunt e-cigarette growth across the board -- not just at the big tobacco companies. Since e-cigarettes are widely viewed as an alternative to combustible cigarettes, Altria, Reynolds American, and Imperial Tobacco may even benefit from more restrictions on e-cigarettes. As a result, none of these companies is seriously threatened by the AHA's recommendations.
The American Heart Association's recommendations could be the death knell for a vibrant e-cigarette market if they are implemented by the FDA. However, big tobacco companies can benefit either way. Therefore, investors need not be concerned about owning tobacco stocks, but they might think twice before trying an e-cigarette.