The electronic-cigarette craze has shifted from "fad" to "here to stay," according to a prominent tobacco industry analyst.
As a result, Wells Fargo Securities analyst Bonnie Herzog expects it's just a matter of time before R.J. Reynolds Tobacco Co. begins selling the products.
"We expect Reynolds to be the next mover into this growing category, most likely organically but we wouldn't rule out a potential acquisition," Herzog said. She said potential targets are NJoy and 21st Century.
"However, with Altria, the race is on: who's next in e-cigs."
Reynolds spokesman David Howard said the company's policy "is to not comment on any rumors or speculation regarding any possible acquisitions."
E-cigarettes, or e-cigs for short, are battery-powered devices that heat a liquid nicotine solution in a disposable cartridge and create a vapor that is inhaled. Refill cartridges can be purchased in different amounts and flavors; five-packs typically cost between $9 and $18.
By comparison, a carton of cigarettes can cost between $25 and $50 for most name brands.
"We think e-cigs are to tobacco what energy drinks are to beverages," Herzog said.
"E-cigs are profitable, growing quickly, gaining shelf space and consumer acceptance; therefore e-cigs are an important new niche category for retailers."
Anyone who has visited the check-out counter at a convenience store or tobacco outlet recently has seen what Herzog is describing – multiple styles of unfamiliar brands on display.
Sales of e-cigs are about $300 million annually by an estimated 2.5 million users, according to Tobacco Vapor Electronic Cigarette Association.
There are projections of $1 billion in annual sales within a few years, Herzog said, in part because there is no federal or state excise taxes on the products.
"It's hard to say what it will take to pull Reynolds in, but e-cigs are getting bigger by the month," said Pat Shehan, owner of Tarheel Tobacco in Winston-Salem.
Even though e-cigs represent a higher upfront cost, "people are willing to pay the price, even in areas that are more economically depressed, so they can smoke in places where they can't now," Shehan said.
The financial and regulatory debate about e-cigs has been swirling for four years.
Some anti-smoking groups lump them with cigarettes and argue they should be regulated and taxed at the same level. Other health advocates say they could be a reduced-risk alternative to cigarettes.
Several states, not North Carolina, are considering placing an excise tax on e-cigs this year so they are treated like cigarettes and smokeless tobacco in raising funds and discouraging use, particularly among teens.
The main sales challenges for e-cigs have been reputational, as in there has been no major tobacco manufacturers selling the products. Therefore many consumers have shied away out of safety concerns since most e-cigs are made in China.
That drawback was removed partially April 25 when Lorillard Inc. bought blu Cigs, based in Charlotte, for $135 million.
Herzog said a recent survey of tobacco retailers and wholesalers found "several respondents noted Lorillard's purchase of blu Cigs lending credibility and legitimacy to the entire category."
Murray Kessler, chairman, chief executive and president of Lorillard, said in a statement that "e-cigarettes offer many of the benefits of other smokeless products but do so in a way that is familiar and enjoyed by current adult cigarette consumers."
"We believe that blu will benefit from Lorillard's regulatory experience and sales infrastructure which are needed for it, and the category, to reach its potential in a responsible manner."
Shehan said he expects Reynolds to buy an e-cigarette company and ship production into the United States "so it could do a better job with oversight."
Scott Ballin, past chairman of the Coalition on Smoking or Health, said it "makes sense for Reynolds to expand its portfolio into the e-cig market."
"I would guess that it would be more logical for them to acquire an existing company than to do it themselves, as they did with Niconovum."
Bill Godshall, executive director of SmokeFree Pennsylvania, said he expects Altria Group Inc., Reynolds and other tobacco companies will go big with e-cigs. Godshall is a vocal advocate for using e-cigs and smokeless tobacco as products to wean smokers from cigarettes.
"The big tobacco companies already have contracts with 500,000 retailers, ensuring highly desirable shelf displays and many other competitive advantages," Godshall said.
E-cigs have drawn opposition from federal and state health officials, including North Carolina, because of where most are made and there is limited regulatory oversight of their contents.
In September 2010, the U.S. Food and Drug Administration sent warning letters to five manufacturers of e-cigarettes or components.
In the letter, the FDA said that the companies are violating the Federal Food, Drug and Cosmetic Act, including unsubstantiated claims and poor manufacturing practices. The FDA has found that some e-cigarettes contain some known cancer-causing chemicals.
The FDA said it intends to regulate e-cigs and related products "in a manner consistent with its mission of protecting the public health."
Some of the debate focuses on how much nicotine is actually consumed through an e-cigarette.
North Carolina's health director, Dr. Jeff Engel, said in November 2010 that consumers should be cautious when considering buying and using e-cigs.
"E-cigarettes are not currently regulated; therefore, there is no way to know if they are safe or effective," Engel said. "They are available in shopping malls and online, and are sold with no age restriction, so they can easily be purchased and used by children and teens."
Engel said he is concerned e-cigs could be addictive, particularly to teens attracted by flavors, such as banana, chocolate and strawberry, that can't be legally used in cigarettes.
"Don't be fooled into thinking an e-cigarette is a safe alternative to smoking, or a sure-fire way to quit," Engel said. "There is no scientific evidence that either of those assumptions is true."
Godshall said that efforts such as Engel's urging for "smokers to continue smoking cigarettes instead of switching to far less hazardous smokefree e-cigs." He said that most e-cigarette companies market the products to adult consumers and not as a safe alternative.
A second major challenge is waiting on the Food and Drug Administration to determine whether it will regulate e-cigs as a tobacco product.
Herzog said most e-cigs' regulation is at the state level in the form of banning the sale of e-cigarettes. A few communities have enacted e-cig public smoking bans.
Another challenge to large tobacco manufacturers buying e-cigarette companies is the uncertainty surrounding patient and intellectual property rights.
Herzog said that Chinese manufacturer Ruyan, also known as Dragonite International Ltd., holds e-cigarette patents in the United States and more than 50 countries.
Before blu Cigs was able to be purchased by Lorillard, it had to reach a settlement deal with Ruyan to use its technology.
"We think it's possible that Altria and Reynolds have been held up on the e-cigarette front due to intellectual-property issues," Herzog said.
"Of course, companies could develop their own intellectual property that would leave them less exposed to patent infringement issues."
Godshall said he is not aware of any major tobacco company introducing a new product or new brand without first taking care of intellectual property rights and copyright concerns.
"As far as I know, no patent court has resolved the e-cigarette patent issues," Godshall said. The example of blu Cigs with Ruyan "would be the reality facing Reynolds and Philip Morris as well unless they choose to develop their own e-cigarette patents."