'Wild, Wild Invest'

Electronic cigarette category attracting funding, regulatory scrutiny

Published in CSP Daily News

SCOTTSDALE, Ariz. -- The $75 million investment in electronic cigarette brand NJOY by Sean Parker, founder of the Napster and a co-developer of Facebook, and Douglas Teitelbaum, principal of merchant bank Homewood Capital, is part of a wave of money firing up a market that is under increasing regulatory scrutiny, reported The Wall Street Journal.

Altria Group Inc., which makes Marlboro cigarettes and controls about half of the U.S. tobacco market, is expected to detail its e-cigarette plans Tuesday, the newspaper said. Reynolds American Inc., maker of Camel cigarettes and the industry's No. 2, said last week it will sell e-cigarettes in Colorado ahead of a national rollout. No. 3 Lorillard Inc. acquired Blu eCigs, NJOY's biggest rival, for $135 million last year.

E-cigarettes are not federally regulated now. The U.S. Food & Drug Administration (FDA) warned consumers in 2009 the new technology could pose its own health risks and required further study. The agency has said it is planning regulations that would treat them as tobacco products, but has provided no details.

In an interview with the Journal last week, Mitch Zeller, director of the FDA's Center for Tobacco Products (CTP), described the e-cigarette market as "the wild, wild West" in terms of regulation.

More than a dozen states, including Arkansas, Colorado and Maryland, have banned e-cigarette sales to minors. New Jersey, North Dakota and Utah have outlawed their use in enclosed public spaces. A bill approved by California's state senate in May would bring e-cigarettes under smoke-free laws covering public buildings, workplaces and restaurants. Boston, Seattle and Indianapolis have extended their smoking bans to the devices, the report said. Airlines do not allow e-cigarettes, nor do Amtrak or Starbucks Corp.

For current smokers, e-cigarettes are believed to be less harmful than traditional smokes, which release most of their toxins through combustion, said the Journal. But some studies indicate nicotine, the addictive agent in cigarettes and in the new devices, may harm fetuses, it said.

The long-term impact of inhaling e-cigarette vapor has yet to be determined, it added.

Among the questions faced by federal regulators: Could e-cigarettes, which currently offer flavors such as chocolate, strawberry and pina colada, serve as a gateway to traditional cigarettes for young people? Will longtime smokers use them only to get a nicotine fix where regular smoking is banned? What kind of age restrictions and warnings should they carry? And what about advertising?

Zeller declined to comment on what future regulations might look like or when they will be proposed. E-cigarette sellers are not currently allowed to make health or smoking cessation claims.

Industry experts say U.S. retail sales of e-cigarettes could reach $1 billion this year, just 1% of the country's cigarette market but twice that of 2012, as they spread from the Internet to store shelves and generate buzz through TV advertisements and celebrity endorsements.

Sales of traditional cigarettes have been falling as public-health officials mount graphic advertising campaigns and push to expand bans on smoking in public places, and as federal and state tax increases have raised cigarette prices.

Although industrywide sales numbers are scarce, NJOY captured 35.6% of the $36.4 million in U.S. convenience-store sales in the four weeks ended May 11, according to Wells Fargo Securities, citing Nielsen scanner data. Lorillard's blu had a 33.9% share, followed by the privately held Logic and 21st Century brands, with 13.8% and 7.4%, respectively.

According to the Journal, Parker is investing nearly $10 million. Homewood Capital, a New York investment fund headed by Douglas Teitelbaum, is investing nearly $40 million. Boston-based Fidelity Investments is contributing about $25 million. And Founders Fund, a San Francisco venture-capital fund started by PayPal co-founder Peter Thiel, is kicking in roughly $5 million.

Teitelbaum said he began exploring an investment in e-cigarettes after deciding the category could be a game-changer and that NJOY's product was impressive. "It's clear they have the flavor right, the look and feel of the cigarette right, the branding and packaging right," Teitelbaum--who says he smoked traditional cigarettes for more than 30 years before switching to NJOY Kings a few months ago--told the paper.

The company has been advertising on TV and has attracted celebrity endorsers such as musicians Courtney Love and Bruno Mars. In March, former U.S. Surgeon General Richard Carmona joined NJOY's board.