The last 50 years can arguably be chalked up as a modest victory for the Centers for Disease and Control Prevention with regard to educating consumers about the potentially dangerous side effects of smoking tobacco.
The CDC wages war on tobacco
Since the mid-1960s the number of adult smokers has fallen from 42% of the U.S. population to just 18%, signaling that awareness of the side effects of smoking – specifically with smoking being linked to a higher risk of developing lung cancer – has helped millions of people walk away from cigarettes. Still, 42.1 million people, per the CDC, are lighting up on a regular basis.
"Why is this my concern," you ask? According to the CDC tobacco use costs an astronomical amount of money to taxpayers each year and strains a healthcare system that's welcomed millions of newly insured participants in over the past year thanks to the Affordable Care Act. The most recent figures show that tobacco costs total a whopping $289 billion each year, of which $133 billion are direct medical costs, while the remaining $156 billion is in lost worker productivity and/or early death. Additionally, the CDC estimates that secondhand smoke costs $5.6 billion in lost productivity annually.
In other words, if this habit can be kicked – and it's a tough and addictive habit to quit – the implication is our healthcare system would be better off and people would, in general, be healthier. Sure, states would lose nearly $26 billion in revenue, but we'd save close to $300 billion a year in direct and indirect healthcare costs.
The rise of the electronic cigarette
In the effort to reduce consumers' desire to smoke and offer alternatives to traditional tobacco cigarettes, the electronic cigarette was born. Rather than utilizing tobacco and the other potentially carcinogenic materials found in cigarettes, an electronic cigarette has a battery-powered heating element which turns a purchased liquid into a vapor or mist which the user inhales. This vapor contains nicotine, as well as other chemicals and flavorings to simulate the act of smoking and to satisfy consumers' desire for nicotine. It also is perceived to be a considerably safer alternative to smoking.
You'd think based on this the perception that it's safer than tobacco cigarettes that electronic cigarettes would have flown off store shelves upon their debut, but that wasn't the case. In fact, the number of adults who claimed to have tried an electronic cigarette only jumped dramatically between 2010 and 2012 from 3% of the population to 8%. This surge, coupled with the fact that electronic cigarettes aren't currently regulated by the Food and Drug Administration, gave some tobacco producers an instant pathway to what they suspected would be untold riches.
Lorillard (UNKNOWN:LO.DL), for example, seized the moment in 2012 by purchasing the Blu brand of electronic cigarettes for $135 million. Today Blu holds better than 40% market share in the electronic cigarette category in the U.S. It should be noted, though, with Lorillard's impending merger with Reynolds American (NYSE:RAI) that the company has announced its intention to divest its Blu brand and rely on Reynolds' Vuse brand instead.
Electronic cigarettes go up in smoke
However, a study released last month by the CDC showed that electronic cigarettes' heyday may have already come and gone.
According to the report, the proportion of adults who've tried electronic cigarettes was steady year over year at around 8%, while regular electronic cigarette users (those who used an electronic cigarette within the past 30 days) stood at just 2% of the adult population. In short, electronic cigarette growth has essentially come to a halt.
Even more disturbing is the fact that 75% of electronic cigarette users admitted to also smoking cigarettes regularly. The entire advent of the electronic cigarette was to curb smokers' want to use tobacco cigarettes, and this study, which shows this figure is largely unchanged over the past four years, throws caution to the wind that electronic cigarettes may not be serving their purpose.
Is this the end of electronic cigarettes?
With many perceived positives you'd be expecting electronic cigarettes to thrive, but we may actually be witnessing their demise for a number of key reasons.
For starters, though the industry isn't currently regulated by the FDA, the FDA is looking into whether or not it will label electronic cigarettes as tobacco products in the future. One reason for this proposed labeling is little to nothing is known about the long-term health effects of inhaling electronic cigarette vapor, and until adequate safety has been established the FDA often takes a conservative course of action. In addition, labeling an electronic cigarette as a tobacco product ensures that it stays out of the hands of minors.
Secondly, and building on the first point, the motive of electronic cigarette manufacturers continues to come into question. While it's impossible to definitively "prove" the intent of electronic cigarette producers, with flavors like bubble gum and cotton candy it's been argued that they aren't targeting their product as a stop-smoking aid, but rather as a cool new thing that young adults can try.
For instance, a study released from Research Triangle Institute in June showed that electronic cigarette TV advertisements that reach children were up 256% between 2011 and 2013, while those for young adults jumped 321% over the same time span! The CDC's study further elaborates on this point when it noted that more than a quarter of a million youths that had never previously smoked a cigarette used an electronic cigarette in 2013. This merely acts as an even greater reason for the FDA to get involved with regulating the industry.
Finally, quality remains a huge concern. FDA regulation would allow stricter testing and observation of new vapor formulations, but could also grind industry growth to a halt. Nowadays the barrier to entry in the electronic cigarette market is nonexistent, which is worrisome from a quality basis when there are more companies than ever present in the industry. This likely only further strengthens the FDA's desire to regulate the industry.
While FDA regulation doesn't mean this industry would be worthless, the hoops that would need to be jumped through and the regulations followed to ensure that electronic cigarettes were being used as a quit smoking aid and not as a retail commodity would likely stymie growth and send a number of smaller competitors packing.
With industry growth already slowing and the industry possessing such small market share, electronic cigarettes' time may have indeed already come and gone.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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