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E-cig biz: Proposed FDA regs should keep sales smokin' hot

The $2 billion electronic cigarette industry blew a big vapor ring of relief Thursday as the FDA released long-awaited proposed regulations for the booming product category, which were seen as much less onerous to existing companies than they could have been.

The proposed rules were also viewed by industry insiders and analysts as benefiting the sector's current leading companies who have already adopted restrictions on sales that anticipated the regulations, including a suggested ban on sales of the nicotine vapor devices to people under age 18.

And they also said rules won't hamper Big Tobacco companies' ability to expand market share in the e-cig category, which could help offset the threat that e-cigs represent to sales of traditional tobacco cigarettes.

But one concern among e-cig advocates was that the Food and Drug Administration's proposal that all e-cig products first receive FDA approval before being sold would slow down the ability to introduce technological improvements in the battery-powered devices, which could in turn harm efforts to convert smokers of cancer-causing tobacco cigarettes.

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That rule could also be a significant hurdle for new companies to enter a market which to date has been wide open. Current companies would have a two-year window to submit their existing products for FDA approval.

"Any 'Johnny-come-lately' will not just be able to throw a product out to the public without it in any way, shape or form being regulated," said Jeff Holman, president of the e-cig company Vapor Corp. "I think it raises the bar."

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"I'm very encouraged" by the proposed rules, said Miguel Martin, president of LOGIC, the second-best-selling e-cig company in the U.S., according to recent Nielsen surveys.

Martin and Holman both said that the fact that the FDA will issue regulations on e-cigs will make the public more comfortable with the products, which began selling in earnest only in 2007, and thus set the stage for potentially greater growth of sales than already seen.

"There's no question that the FDA's oversight, which we welcome, brings legitimacy to the category," Martin said. "Companies that are acting responsibly, I think, will be given every opportunity to be successful from a business perspective."

Jason Healy, founder and president of e-cig market leader Blu, during an on-air appearance on CNBC, said, "As long as the rules are universal, and they will be, then I see no detriment to the business."

Tobacco giant Lorillard bought Blu two years ago. Since then, its fellow Big Three members Altria and Reynolds American have both begun rolling out their own homegrown e-cigarette products in a bid to ride the category's sales wave.

The FDA's proposed rules, which will now be subject to a 75-day public comment period, include the ban on sales to minors, a ban on free samples, a ban on vending machine sales in any venue that is open to minors and mandated disclosure of all ingredients in the product.

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On the other hand, the FDA did not propose a ban on advertising or Internet-based sales, nor did it endorse, per se, a ban on flavorings.

"At first glance, not as bad as feared," wrote Wells Fargo tobacco analyst Bonnie Herzog in an analysis published Thursday.

The proposed regulations are broadly speaking "as expected, and not as restrictive as some had feared," wrote Herzog, who has predicted that e-cigs could overtake traditional cigarettes in total sales within a decade. Tobacco cigarette sales are currently about $80 billion annually.

Herzog warned, however, that "our main concern remains around e-cig/e-vapor innovation, which, if stifled, could dramatically slow down industry growth and conversion from combustible cigs, which would ultimately result in net negative public health impact."

Rob Burton, director of corporate regulation affairs at White Cloud Electronic Cigarettes, was pleased there was no outright ban on flavoring proposed by the FDA. White Cloud sells e-cig liquid in five different strengths—including zero-percent nicotine—and in 19 different flavors.

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"We feel that just because you're an adult doesn't mean that you shouldn't have a choice of flavors," Burton said. "The wider the choice, the better the opportunity for them to switch to the alternative" from traditional cigarettes, he said.

Burton also was happy that the proposed rules open the door to the possibility that e-cig manufacturers will be able to make health-based claims. The FDA said Thursday that such "direct and implied claims of reduced risk" could be made "if the FDA confirms that scientific evidence supports the claim and that marketing the product will benefit public health as a whole."

Although e-cig companies currently do not make such health-based claims, many of their users have adopted the products in the belief that they are significantly safer than tobacco cigarettes, even as extensive studies on the new products has yet to be performed.

Smoking tobacco products leads to the deaths of an estimated 480,000 people in the U.S. each year.

That death toll was echoed in a response to the proposed regulations by Craig Weiss, president and CEO of NJOY, one of the top-selling e-cig companies.

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"By resisting calls to regulate ahead of—and indeed in opposition to—the science and the data, today the FDA has brought NJOY a giant step closer to achieving its corporate mission of obsoleting cigarettes," Weiss said. "There are encouraging signs that 10 years from now, this date will be remembered as the beginning of the end of the tobacco epidemic."

That said, the tobacco companies themselves are poised to exploit their huge piles of cash and retail-channel distribution networks as they try to gain market share in e-cigs.

Wells Fargo's Herzog, in her research note, wrote that she expects the "e-cig battleground" to get hotter this year, "especially as the 'Big 3' tobacco manufacturers push further into the category."

"We expect the 'Big 3' to ultimately have a meaningful presence and to accelerate growth in the category," Herzog wrote.

Altria, in a prepared statement, said it and its tobacco companies "have expressed support of the FDA extending appropriate regulatory authority over cigars and e-vapor products."

"With these proposed deeming regulations, we believe FDA has an unprecedented opportunity to advance public health goals by recognizing that some types of tobacco products may have significantly lower risks compared to cigarettes," Altria said. "We believe FDA should adopt a regulatory framework that recognizes the differences in tobacco products and fosters innovation that may benefit public health. The framework must be grounded in science and evidence. FDA is in the best position to assess the science and determine how best to communicate relative risk information to consumers."

"We are in the process of reviewing the proposed regulations and will provide our perspective to the FDA."

In its own statement, Reynolds American said, "We are currently reviewing the proposed deeming regulation and are not in a position to comment on anything specific at this time."

"It's important to note that the issuance of the draft deeming regulation simply begins a process that includes a 75-day public comment period. We will provide comments on the draft regulation and participate in the rulemaking process," Reynolds said. "Additionally, the issuance of the proposed deeming regulation does not affect the current marketplace for e-cigarettes."

—By CNBC's Dan Mangan.