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E-Cigarettes: A $1.5 Billion Industry Braces for FDA Regulation


Behind this week’s coverPhoto illustration by Justin Metz;Cowboy: Mark Lisk/AlamyBehind this week’s cover

The first time J. Andries Verleur tried an e-cigarette in 2008, he burned his lip and accidentally inhaled the nicotine fluid. “It was one of the worst products I ever tried,” he recalls, “but the idea was amazing.”

Verleur, a heavy smoker, was living in Prague and happened to spot the strange new product in a Vietnamese grocery store. The crude early version obviously didn’t work very well, but Verleur, a serial entrepreneur, immediately realized that if it did work, it could upend the tobacco industry. That was worth looking into: Cigarettes are a global business that generates more than half a trillion dollars every year, according to data from Euromonitor International.

In its simplest form, an e-cigarette is a cartridge filled with a nicotine solution and a battery powering a coil that heats the solution into vapor, which one sucks in and exhales like smoke. Typically, it looks like a regular cigarette, except the tip, embedded with an LED, often glows blue instead of red. The active ingredient in e-cigarettes is the same nicotine found in cigarettes and nicotine patches.

The effects of inhaling nicotine vapor are not totally understood, but there is no evidence to date that it causes cancer. Experts and logic seem to agree that it’s a lot better than setting chopped-up tobacco leaves on fire and inhaling the nicotine along with thousands of combustion byproducts, some of which are definitely carcinogenic. Because cancer is the main drawback of smoking for a lot of people, the delivery of nicotine without lighting a cigarette is very attractive. And because it produces a wispy vapor instead of acrid smoke, an e-cigarette lets you bring your smoking back indoors, where lighting up in an enclosed space is no longer socially, or legally, acceptable.

Verleur saw right away that if e-cigarettes could be made as convenient and satisfying as a pack of smokes, he’d make a killing. He enlisted the help of his brother, an engineer working for an Agilent Technologies (A) spinoff; booked a trip to China; and began meeting with manufacturers. In 2009 he formed his company, V2Cigs, with four employees working out of an apartment.

Five years later, V2Cigs has six manufacturing facilities in Shenzhen, China, a Miami headquarters, 250 employees, and 5 million customers worldwide. Verleur says more than a million of those are in the U.S., where Bloomberg Industries projects total e-cigarette sales could reach $1.5 billion this year. Other competitors now include NJoy, Vapor (VPCO), and Victory Electronic Cigarettes (ECIG), as well as the major tobacco manufacturers and hundreds of others.

It all still represents a tiny fraction of what Americans spend on tobacco, but it’s pretty solid for an industry that barely existed five years ago. A projection by Bloomberg Industries shows e-cigarette sales could surpass that of the traditional tobacco product by as early as 2023. Who will dominate the market is a different question, and one that may be answered not by the markets, but by the government.
 
 
A primitive, battery-operated “smokeless non-tobacco cigarette” was patented as early as 1963 and described in Popular Mechanics in 1965. Thomas Schelling, a Nobel prize-winning economist who helped start the Institute for the Study of Smoking Behavior and Policy at Harvard University’s Kennedy School in the 1980s, recalls that people in the 1960s were talking about a charcoal-based vaporizer that would heat some sort of nicotine solution. While those early versions might have been safer than a regular cigarette, they were too expensive and cumbersome to become a substitute for a pack of Camels in a country where, as Schelling notes, “you’re never more than 5 or 10 minutes away from a smoke.”

In a way, electronic cigarettes were made possible by cell phones. The drive to make phones smaller and lengthen their battery life led to the development of batteries and equipment small enough to fit in a container the size and shape of a cigarette. There’s some dispute over who invented the modern e-cigarette, but the first commercially marketed device was created by a Chinese pharmacist, Hon Lik, and introduced to the Chinese market as a smoking cessation device in 2004. From there, e-cigarettes made their way to small shops such as that of the Vietnamese grocer who sold Verleur his first one four years later.

E-cigarettes beat the traditional kind in one big way: You can legally have them shipped to you in the comfort and privacy of your home. (It’s not legal to send traditional cigarettes through the U.S. mail.) Blu, made by Greensboro (N.C.)-based Lorillard (LO), one of the biggest producers of tobacco cigarettes, makes a starter pack that comes with a charger that doubles as a storage container, and it looks just like a pack of cigarettes. It also comes with two batteries and five nicotine cartridges good for about 150 puffs apiece. The pack costs about $80 before shipping, which is roughly equal to the price of 8 to 16 packs of cigarettes. (Disposable e-cigarettes are cheaper to start, but in the long run they’re much less economical.) Because nicotine cartridges are exempt from tobacco taxes, which now make up much of the retail cost of a cigarette, a pack of cartridges is competitive with old-fashioned smokes, especially if you live in an expensive jurisdiction such as New York.

E-cigarette cartridges come in classic tobacco and menthol flavors—Verleur’s company even offers V2 Red, Sahara, and Congress, clearly aimed at loyal smokers of Marlboros, Camels, and Parliaments. But most companies also have less conventional flavors. Blu offers Peach Schnapps, Java Jolt, Vivid Vanilla, Cherry Crush, and Piña Colada, presumably for people who don’t just like a drink with a cigarette, but in one.

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Jeff Ky is a salesman at My Vapez in Arlington, Va., where you can buy a variety of e-cigarettes and larger vaporizers that look like cigars. The array of flavors is astonishing, and he says the fruity flavors, not the traditional tobacco styles, are the most popular. Potential customers come into his store looking to quit and usually buy the classic tobacco flavor. Once they’ve kicked traditional cigarettes, they often start wanting something sweeter tasting, which Lorillard says is also its experience with Blu. Ky’s best-selling flavor is cantaloupe-kiwi, and he uses a mixture that’s supposed to taste like Strawberry Nesquik. Cartridges also come in varying strengths, ranging from high concentrations of nicotine to low concentrations to no nicotine at all for smokers trying to quit.

To find out how they tasted and if they were anything like a real cigarette, I ordered online a starter pack of Blu in menthol with a high concentration of nicotine. When the pack arrived, I had to read the directions carefully just to figure out how to charge the battery, which looked like the white part of a traditional cigarette, and then connect it to the nicotine cartridge, which looked like a filter.

After I’d put it together, I had something surprisingly close to one of the cigarettes I used to smoke. The mentholated tobacco flavor rolled sinuously over my tongue, hit the back of my throat in an unctuously familiar cloud, and rushed through my capillaries, buzzing along my dormant nicotine receptors. The only thing missing was the unpleasant clawing feeling in my chest as my lungs begged me not to pollute them with tar and soot.

I couldn’t wait to try them in a bar, so I met a friend for a drink at a local Washington watering hole. I hadn’t had a cigarette in a bar since sometime in the late 1990s, and I felt self-conscious, maybe a little bit lonely: There’s no social aspect, or even the hint of an invitation, in an e-cigarette. You don’t pass the pack around, and no one is going to bum an e-cigarette off of you. “It becomes more like a hobby,” says Ky of his customers, with users showing off their newest gear. But yes, an e-cigarette still tastes good with a drink.

In fact, it tastes almost too good. Like most smokers, I quit cigarettes several times before succeeding, and each time I quit, I had reached a point where I was basically glad to put down the cigarettes because they made me feel terrible. E-cigarettes don’t hurt and don’t offer the same incentive to quit. You could use one on the treadmill if you were so inclined.

Nicotine helps regulate your mood, and it is an appetite suppressant, too, which is why smokers who quit generally gain weight. It’s a cognitive enhancer, and there’s some hotly contested evidence that it may slow the onset of Alzheimer’s disease. For a sedentary knowledge worker facing the declines of middle age, that’s an attractive combination. Indeed, one academic who does research in this area confided that he’s thinking of taking up e-cigarettes because of the advantages of nicotine, even though he’s never smoked. (He is not prepared to go on the record recommending that people add nicotine to their diets.)

The professor and I are exactly why some public-health experts want e-cigarettes treated like regular cigarettes: plastered with warnings, laden with taxes, and definitely not sold in flavors such as piña colada. “If e-cigarettes were regulated so that they became a way to get people off cigarettes, we would lead the cheer. But the issues are complicated,” says Matt Myers, president of Campaign for Tobacco-Free Kids. “E-cigarettes are not harmless. You want to discourage people who do not currently use e-cigarettes from taking up the habit. Our concern is that it will re-glamorize smoking and lead people to switch to cigarettes, or experiment with cigarettes.”
 
 
In October the European Parliament rejected a proposal to regulate e-cigarettes as medical devices. The U.S. Food and Drug Administration, which is in the process of drafting rules, is expected by observers to follow suit. The decision is important to pharmaceutical companies such as GlaxoSmithKline (GSK) and Pfizer (PFE), which sell nicotine patches and gums that are regulated as medical tools and may not want unregulated competition.

The proposed regulations could be anything from basic rules ensuring that the nicotine cartridges contain what they’re supposed to and that the devices are safe to a scheme of the kind that Myers wants, with restrictions on flavored products and sexy marketing campaigns. Tight regulation would make the market much more complicated for upstarts such as V2Cigs, which don’t have the marketing or lobbying muscle of Big Tobacco.

Some local government officials and regulators in other countries have already made a decision. Under former Mayor Michael Bloomberg (who owns Bloomberg LP, parent of Bloomberg Businessweek), New York in December expanded the ban on smoking in public places to include electronic cigarettes. In Chicago, Mayor Rahm Emanuel pushed for the same restrictions, and they have been adopted. Brazil has banned e-cigarettes outright.

As nothing but a replacement product for existing smokers, e-cigarettes seem like a public-health win. Widespread adoption by current smokers “could potentially reduce smoking deaths by more than 90 percent,” says Joel Nitzkin, a public-health physician who is a senior fellow at free-market think tank R Street in Washington.

But what if current smokers aren’t the only people who use them? What if e-cigarettes lure back people who used to smoke or attract new smokers? What if people who otherwise would have quit keep using nicotine? And perhaps the No. 1 argument: What if e-cigarettes make smoking normal again in public places, with the attendant annoyance of a neighbor or officemate blowing nicotine-laced steam everywhere?

Since the Office of the Surgeon General warned of its dangers in the 1960s, smoking has declined dramatically and is quite rare among the U.S. middle class. That’s because of its health risks, but also because of the social stigma and inconvenience associated with smoking. With the exception of some hipsters, smoking is largely a lower-income phenomenon. “You may be establishing something you want to establish in your group, but it’s a pretty downscale group,” says Mark Kleiman, a professor of public policy at the University of California at Los Angeles.

But if the stigma is undone, “we could go back to 50 percent of the population routinely using nicotine,” Kleiman says. That doesn’t mean he thinks we should ban e-cigarettes. “Given the certain gain from switching current smokers to e-cigs and the uncertain signs of the effects of adding new users, it seems to me that we should get public policy out of the way for now while watching to see how many of today’s happy e-cig users become unhappy users three years from now.”

A 2011 study published in the Journal of Public Health Policy concluded that “a preponderance of the available evidence shows [e-cigarettes] to be much safer than tobacco cigarettes and comparable in toxicity to conventional nicotine replacement products.” It also said there’s “reason to believe that they offer an advantage over traditional nicotine delivery devices.” The other main ingredients in e-cigarettes are what the FDA calls “generally recognized as safe”: glycerine, found in many foods, and propylene glycol, the main ingredient in theatrical fog.

E-cigarettes don’t only assuage the desire for nicotine but also the desire to have a cigarette, which isn’t exactly the same thing: One study found that even an e-cigarette rigged to deliver “minimal” nicotine could reduce cravings in a substantial minority of smokers. V2Cigs’ Verleur estimates that while half of his customers use his product to replace cigarettes, either completely or in places where they aren’t allowed to smoke, about one-quarter start at the highest concentration and work their way down toward the no-nicotine version, at which point some stop entirely, while others keep buying the nicotine-free ones.

Even without the combustion, nicotine is a vasoconstrictor that narrows blood vessels and drives up blood pressure. Doing that a dozen times a day is less bad than getting lung cancer, but it’s still not great. Besides, there is no study on what inhaling those “generally recognized as safe” compounds might do to your lungs if you inhale them daily for a few decades. It’s hard to imagine that the health effects could be worse than setting something on fire and deliberately breathing the smoke. But they’re probably not as good as quitting. “The antismokers think we’re going to win—that we can get to zero tobacco,” says Kleiman. If that’s what you believe, then you’re likely to endorse stiff restrictions on e-cigarettes. On the other hand, if you think U.S. tobacco consumption will stay stubbornly stuck between 10 percent and 20 percent of the population for the foreseeable future—which means tobacco deaths will remain in the hundreds of thousands annually—you’re more likely to be agitating for the federal government to take a light hand, even if it means opening the door to the possibility of a renewed national mania for nicotine.

Among the FDA’s most difficult decisions will be determining whether e-cigarettes will be a gateway product, encouraging young smokers to develop a nicotine habit that might lead to tobacco use. After all, many of the things that make e-cigarettes attractive to smokers make them even more attractive to minors. It’s actually pretty unpleasant to start smoking—it causes dizziness, it causes coughing, and it usually takes kids a while to learn to inhale—but anyone can inhale e-cigarette vapor on the first puff. And since e-cigarettes don’t have much odor, they’re harder for parents to detect. During the debate over New York’s policy, a September report from the Centers for Disease Control and Prevention showing e-cigarette use on the rise among teenagers was prominently discussed. Spokesmen for Altria Group (MO), Reynolds American (RAI), and Lorillard—the Big Three of tobacco—are in agreement that children should be prevented from buying e-cigarettes, just as they are prevented from buying the regular kind.
 
 
Small e-cigarette manufacturers who exploited the power of the Internet have had the nascent market largely to themselves, but that’s changing. “A year and a half ago, there were over 450 e-cigarette companies in the U.S. market, many of them mom-and-pop operations,” Verleur says. There are still a few hundred companies out there, most of them tiny. According to Verleur, “over 70 percent of U.S. market share is held by about 10 companies.”

Lorillard, which makes Kent and Newport cigarettes, has joined the e-cigarette market aggressively. It almost has to, according to Kenneth Shea of Bloomberg Industries, not only because cigarette sales have plateaued, but because 90 percent of the company’s sales come from menthol cigarettes, which the FDA is under pressure to ban, as it banned other flavored tobacco products that public-health advocates argued were especially appealing to children. In 2012, Lorillard bought Blu for $135 million in cash and has boosted its distribution to more than 125,000 stores. The brand is the market leader.

Big Tobacco’s advantages will probably strengthen once the FDA releases its proposed rules. Analysts expect some restrictions on Internet sales because it’s too easy for minors to get the devices online. But while it’s relatively easy for a small company to become established on the Internet, it’s much harder to secure scarce shelf space behind a drugstore counter. The tighter the FDA regulation, the more valuable distribution networks and marketing power become. And of course, the more lobbyists a company can afford, the more likely it is to get regulations it likes.

Altria and Reynolds, which are the market leaders in sales of regular cigarettes, are entering the market as well. On Feb. 3, Altria announced it was buying e-cigarette company Green Smoke for $110 million. They have also created their own products, MarkTen (Altria) and Vuse (Reynolds). Their e-cigarettes look sleek, but like traditional cigarettes come in only two flavors: regular and menthol. They’re rolled out exclusively through retailers. Altria has launched its MarkTen in only two test markets, as Reynolds has with its Vuse. In November the Wall Street Journal reported that in Colorado, where Vuse was introduced in July, the product gained 55 percent of the e-cigarette market in a few months.

For all the taxes and regulations that have been slapped on the companies, their profit margins are healthy: Demand for their product is inelastic, consumers are loyal, and most of the market is controlled by Altria, Reynolds, and Lorillard. Tobacco is a business they would clearly rather not endanger with a misstep in the e-cigarette market—either by enraging the government or by cannibalizing their own sales.

The tobacco companies are also entering the market without any of their iconic brands, which tend to lose customers only when smokers quit or die. There’s no Camel or Marlboro e-cigarette. The Tobacco Master Settlement Agreement reached with state attorneys general in 1998 makes it tricky to use cigarette brands on other merchandise. Although some company will probably test that in the future, clearly no one’s feeling so bold yet. Doing without a major brand is a big handicap, particularly because the small companies have already spent years establishing a brand. Verleur points out that he and his competitors have experience working out technical issues with the electronics and the nicotine solution, neither of which are likely to be core strengths at a company that specializes in burning leaves. He waits for the government’s decision on which the fate of his business rests. The more lightly the area is regulated, the better chance the upstarts will have of taking on Big Tobacco and winning. “It’s our sincere hope,” he says, “that regulators and legislators take a responsible approach towards our category.”

McArdle is a Bloomberg View columnist. Her new book is The Up Side of Down: Why Failing Well Is the Key to Success.

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