Analysts: E-cig volume for retailers could rise if FDA restricts online sales

Aug. 23–Reynolds American Inc. and other traditional tobacco manufacturers could gain significant headwinds on their electronic-cigarette initiatives if the Food and Drug Administration decides to restrict or ban online sales of the products, according to analysts.

E-cigs are battery-powered devices that heat a liquid nicotine solution in a disposable cartridge and create a vapor that is inhaled.

The tobacco industry, advocacy groups and consumers have been waiting several years for the FDA to decide how it will regulate e-cigs for product safety, minimum legal age for use, flavors, marketing and retail availability. The Wall Street Journal reported Thursday that the FDA could unveil its e-cig recommendations in October.

The FDA began regulating tobacco products and marketing in June 2009, but it cannot ban nicotine or tobacco.

Advocates pushing for the ban of online e-cigs sales say it is necessary to keep the products out of the hands of minors. The two major brands for e-cigs — blu Ecigs and NJoy — have been conducting print, radio and television advertising campaigns that are limited or prohibited by federal law for cigarettes.

As the FDA considers its options, e-cig sales continue to climb, including by online companies who are providing dozens of flavors banned or restricted in traditional cigarettes.

The big three traditional manufacturers — Reynolds, Philip Morris USA and Lorillard Inc. — are carving niches through developing their own products (Reynolds’ Vuse and Philip Morris’ MarkTen) or a brand they purchased (Lorillard’s blu Ecigs).

Bonnie Herzog, an analyst with Wells Fargo Securities, projected $1. 7 billion in retail sales for e-cigs this year, with annual sales possibly exceeding $10 billion by 2017.

“We have long been saying that we expect tight regulations of e-cigs and that we wouldn’t be surprised if an online ban was eventually enacted,” Herzog said.

“If online sales are banned, we’d expect most of the online sales volume — $500 million to $625 million — to move to traditional retailers, where we believe e-cig sales have passed $1 billion. ”

Herzog said an online sales ban would be “a huge positive” for e-cig manufacturers already well entrenched with retailers, such as blu Ecigs and NJoy. Herzog estimates that between 15 percent and 20 percent of blu Ecigs’ sales are online. She expects those customers would shift to buying the products at traditional retail outlets.

She said Reynolds and Philip Morris would benefit as they expand out of test markets.

Even with an online ban of e-cigs sales, Herzog said “this does not impact our bullish thesis that consumption of e-cigs could overtake conventional cigs within the next decade. ”

Determining regulations for e-cigs has been a priority of Mitch Zeller, who became director of the FDA’s Center for Tobacco Products in March.

“It is true that more research is needed on the health effects of e-cigarettes,” Zeller told the Wall Street Journal. “However, we do not need more research on whether e-cigarettes should or should not be included in proposed FDA regulations. ”

One of the center’s chief tasks is creating regulations for smokeless tobacco products, such as moist snuff. It also is charged with evaluating applications for new “modified risk” tobacco products, such as R. J. Reynolds Tobacco Co. ‘s Camel dissolvable orbs, film strips and sticks, and e-cigs.

A company that wants to market a lower-risk tobacco product in the United States must offer scientific proof to the FDA that the product will not only reduce harm to individual users, but also benefit the health of the population as a whole.

E-cigs “likely pose less direct hazard to the individual smoker than tobacco cigarettes and might help smokers quit smoking or reduce harm by smoking fewer tobacco cigarettes,” former FDA advisor Dr. Neal Benowitz co-wrote in a July 15 report posted on the Journal of the American Medical Association’s website.

“On the other hand, there are potential harms, including promoting continued smoking of cigarettes and renormalizing cigarette smoking behaviors. ”

Dr. Gilbert Ross, of the American Council on Science and Health, said he questions the need for a ban of online e-cig sales.

“Why would the FDA ban online sales of a product which is highly likely to be no more dangerous than hi-test coffee drinks? ” Ross asked.

“There is no evidence whatsoever that significant numbers of kids are interested in using e-cigarettes. No one has been harmed by e-cigarettes. Yes, nicotine is addictive, that’s the point of e-cigarettes and harm reduction.

“The real winners here will be Big Tobacco, and the losers will be small e-cigarette marketers and desperate smokers,” Ross said.

rcraver@wsjournal. com

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