E-cig sellers jockey for market position before FDA issues regulations

Electronic cigarettes
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Sell 'em if you've got 'em—without regulations.

Makers of electronic cigarettes are enjoying a booming marketplace even as they keep wary eye on the Food and Drug Administration, which is expected to release proposed regulations of the nicotine-vapor-peddling category this fall.

The lack of federal regulations on e-cigarettes—in contrast to tight rules on traditional smokes—has given companies a long leash. Sales of the products are projected to double to $1 billion, with about 250 different brands, all without nationwide restrictions on advertising, Internet sales, flavorings or even the age of buyers.

But those days are numbered.

Vivien Azer, a Citigroup tobacco analyst, said the lack of federal regulations has given e-cig companies "some breathing room" to grow. "You think about the competition landscape," she said. "Part of that is trying to get as much done as possible before regulation."

In early July, the FDA said that it would issue proposed rules on unspecified "tobacco products" in October. Those products are widely assumed to be e-cigarettes, which a 2010 court decision allows the agency to regulate.

The FDA declined to comment on the timing or contents of its planned "deeming regulations" for e-cigs, which are gaining popularity because they are perceived as being less harmful than traditional cigarettes. They also help and avoid the smell and indoor bans that plague tobacco smokers.

Azer and other industry observers said implementation of the regulations, after the FDA considers public comment could take another 12 to 18 months.

"There's an incentive now to get as good as you can before the FDA starts regulation," said Dr. Neal Benowitz of San Francisco General Hospital Medical Center.

"People know at some point these products are going to be evaluated. Therefore, there's an incentive to put together an effective product that people like, that are also safe," said Benowitz, who co-authored the article "The Regulatory Challenge of Electronic Cigarettes" published Monday in the Journal of the American Medical Association.

'May the best company win'

"At this point, it's a free trade, and may the best company win," said Eli Alelov, CEO of Logic Technology, the nation's No. 3 e-cig company.

His company is being realistic about possible FDA rules, however. For example, Logic advertises on more than 15 radio stations and is contemplating launching an expensive television campaign. That would follow TV ads by two of its leading competitors, Njoy and Blu (the latter was bought by Lorillard last year). Both radio and TV are off-limits to traditional cigarette ads.

"We're supposed to start a campaign by the end of the year," Alelov said of Logic's TV push. But, he added, "we want to wait for the FDA's proposed regulations to suggest "what we can and can't show on television."

Matthew Steingraber, co-founder of White Cloud Electronic Cigarettes, said there are "positives" that come from having no federal regulation, including "flexibility in the type of nicotine we can offer, and we're not held to a certain flavor."

White Could sells e-cigarettes containing six different strengths, ranging from "nicotine-free all the way up to 5.4 percent by volume," he said, adding that the options are a selling point to those looking to transition to e-cigs and then taper down their nicotine consumption.

The Tarpon Springs, Fla.-based company also sells 19 different flavors of e-cigs, including two added last month: Iced Berry and Zero K, which boasts "a cold blast of peppermint."

Flavors are prohibited for traditional cigarette makers. In 2009, the FDA flexed its muscle in regulating tobacco for the first time by banning candy- fruit- or clove-flavored cigarettes because of concerns they would attract teens.

"Adults, in fact, like fruit-flavored things, and I think it's a nice change, whenever you're switching from tobacco, which tastes horrible, to have different flavors available to you," Steingraber said.

He is concerned that the FDA might decide to ban flavored e-cigarettes as well. That "would most likely turn smokers off of the product" because they would be left with "an essentially flavorless" vapor that would make traditional cigarettes appear preferable in comparison, he said.

He argues that banning flavors in or setting maximums on nicotine content in e-cigs would make kicking the tobacco habit even harder for traditional smokers.

But a perhaps bigger concern for Steingraber and other executives at e-cig makers is a potential ban on Internet sales. Seventy-five percent of White Cloud's business is in online transactions.

"What would deliver the hardest blow to e-cigarettes ... would probably be something that eliminates online sales," said Steingraber, adding that such a ban would only help the tobacco giants that sell e-cigs and already have a massive retail footprint from their traditional products. "It would be somewhat catastrophic," he said.

But White Cloud, Logic and a number of other companies welcome the prospect that the FDA regulations will include quality-control standards in e-cigarette manufacture and in the nicotine-laced liquids the devices vaporize for inhalation.

In fact, a number of e-cigarette makers are already marketing their products as if some rules are in effect.

Altria, the parent of Philip Morris, will begin selling its e-cig line, MarkTen, in August in Indiana. David Sylvia, a spokesman for Altria, said any FDA rules should encourage "good product guidelines and good manufacturing practices" in the category. "It should lead to better product performance and reduced variability," he added.

Altria has not disclosed details of its MarkTen campaign, and Sylvia declined to answer whether the company would advertise on TV or radio.

But Altria is holding the product to standards similar to those for its traditional cigarette brands, he said.

For example, although there are no federal rules about purchase age or behind-the-counter display, Altria's contracts with vendors state that "the product will be sold behind the counter, in a clerk-assisted fashion, to people 18 and over," Sylvia said.

Those agreements happen to comply with an Indiana state law enacted in July, but Sylvia said Altria supports federal regulation that would provide consistency for e-cig vendors, who now face a "hodgepodge patchwork" of state regulations.

After years on the sidelines, No. 2 tobacco company Reynolds American is entering the e-cigarette market, rolling out its Vuse line in Colorado this month. The company plans to advertise Vuse on TV as it tries to build share in a tight market.

(Read more: Reynolds American sees e-cigarette launch as a 'game changer')

"The FDA recognizes that we do have the right ... to advertise on TV," said David Howard, spokesman for R.J. Reynolds Vapor, the subsidiary selling Vuse. But, he added, "in our television ads you will not see people using the product."

In addition, Vuse will not be marketed online. Howard said that decision was a function of not having enough security to ensure that the products were being sold only to adults—a concern that reflects recognition that the FDA will be regulating e-cigs as tobacco products.

"Therefore, we are marketing them as tobacco products," Howard said.

By CNBC's Dan Mangan. Follow him on Twitter @_DanMangan.