It’s not too often a product comes along with so much potential. A product with so much pent up demand. A product that is significantly cheaper than alternatives. A product that sells so extremely well right out of the gate the potential to turn a very small speculation into a big score is obvious.
That’s what we’re facing here. The market potential is hundreds of billions. Every retailer who carries it has trouble keeping it in stock. It’s the same type of popularity which turned Crocs (NASDAQ:CROX) into a shooting star, made Healys (NASDAQ:HLYS), and pushed sales of Snuggies past the four million mark.
Sounds like it has some potential right?
Well, it does have a lot of potential. That is of course, if the World Health Organization (WHO), the FDA, Big Pharma, Big Tobacco, and a U.S. Senator don’t get it completely outlawed.
I’m talking about the latest nicotine replacement therapy (NRT), electronic cigarettes, or e-cigarettes.
An e-cigarette is a battery powered device that looks like a cigarette. It has a small vaporizer which turns a nicotine cartridge into a breathable vapor. It’s an alternative delivery form of nicotine which, according to many of the e-cigarette retailers, provides the nicotine of a cigarette without a lot of the other contaminants in a regular cigarette (e-cigarette description and pictures).
There’s just so much potential growth. A recent smoking cessation report from consultancy firm Visiongain says, “E-Cigarettes will revolutionize the face of tobacco smoking and could pose a threat to the smoking cessation market.”
As you might expect, a product like this will be in very high demand.
Another Boom Emerges
Jason Cropper, manager of the Electronic Cigarette Company in the U.K., in an interview with Reuters stated, “We can’t keep up with demand. The demand is phenomenal. I’ve got a website run by a lady in Florida and she’s totally out of stock.”
If you go a bit further, it’s easy to see how well these are selling. At the time of this writing, two out of three e-cigarettes at zerotar.net were sold out. Specialty Retailer magazine reports mall kiosks selling e-cigarettes generate about $50,000 in sales per month. There’s not much data out there, but it’s easy to see sales of e-cigarettes are soaring.
From a cost perspective, e-cigarettes are tough to beat. The initial start-up cost of around $100 for charger, battery, vaporizer, etc. The ongoing costs (buying more nicotine cartridges) are around 50 cents to $1 a day (to get the same amount of nicotine as one pack of cigarettes per day).
When you compare that to the cost of $150 to $250 per month (depending on which state you’re in) though, it’s easy to see e-cigarettes are a much cheaper alternative. As an alternative to gum, patches, sprays, lozenges, and inhalers, e-cigarettes are much cheaper as well. And from a health perspective…I think the answer is pretty clear.
From an investment perspective, this is the kind of “disruptive technology” which has changed the face of industry and created fortunes for early investors. Just think of a product, if successful, reaches just 10% of the 500 million+ smokers around the world. That’s the kind of potential we’re looking at here.
Best of all there is one publicly traded company leading the way in the e-cigarette revolution. More on that in moment. First, there’s a big back story here with a lot of pitfalls. It’s a complicated situation with politics set to play a big role in the near future.
Another Competitor Stifled?
What may surprise you is e-cigarettes may not stay on the market much longer even though they’re still relatively new.
It’s no secret how much Big Pharma and Big Tobacco companies spend on lobbying. We watched the impact yet again this past week as the federal government upped the tobacco tax and the House of Representatives passed the Family Smoking Prevention and Tobacco Control Act.
Of course, the bill had the support of Altria (NYSE:MO), the operator of Philip Morris and owner of the world’s best-selling cigarette brand, Marlboro. The act limited advertising (read: protected market share changes for current competitors) and would give the FDA all sorts of new regulatory powers.
And with a name like “Family Smoking Prevention and Tobacco Control Act,” what politician would want to vote against it?
Big Tobacco would naturally be against the e-cigarette’s success. It’s a direct competitor. In this case, it’s more than just Big Tobacco. Big Pharma has a big stake in this battle as well.
The $3 billion nicotine replacement industry has become a cash cow for pharmaceutical companies. All of those patches and gum sales are easy profits and they’re mostly backed by Big Pharma. Nicoderm is owned by ALZA, wholly owned subsidiary of Johnson & Johnson (NYSE:JNJ). Nicorette and the prescription drugs Wellbutrin and Zyban are marketed by GlaxoSmithKline (NYSE:GSK). And one of the latest entrants, Chantix, is marketed by Pfizer (NYSE:PFE). Of course there are many more but you get the point.
They’ve all seen the early success of e-cigarettes. They see the potential impact to their bottom lines. And they are making the moves necessary to stifle the competition.
Unsafe Until Proven Safe
Recently, New Jersey Senator Jim Lauterman tried to put an end to e-cigarette sales in the U.S. According to his press office:
Sen. Frank R. Lautenberg (D-NJ) today urged the Food and Drug Administration (FDA) to take electronic cigarettes, or “e-cigarettes,” off the market until they are proven safe by the federal agency.
Electronic cigarettes, alternatives to cigarettes and other tobacco products, are battery-powered devices that use a vapor to deliver nicotine to smokers. When the smoker inhales through the device, air flow is detected by a sensor, which activates a heating element that vaporizes a nicotine solution stored in the mouthpiece.
Manufacturers and retailers of these products claim that electronic cigarettes are safe, and even that these products can help smokers quit traditional cigarettes. However, no clinical studies have proven these products are effective in helping smokers quit smoking, nor have any studies considered the safety of these products’ long-term health effects. While the FDA has indicated it will evaluate electronic cigarettes on a case-by-case basis, it has not taken any enforcement action against these products, which are currently being sold in mall kiosks across the country and on the Internet.
Sen. Lautenberg is one of the Senate’s leaders in protecting Americans from the dangers of smoking. Sen. Lautenberg wrote the law banning smoking on airplanes, which helped trigger a broader smoke-free revolution. Sen. Lautenberg is also the author of a law banning smoking in buildings that house federally-funded facilities that serve children.
This would subject them to FDA approval. The costs of which would stifle the small upstart companies who make e-cigarettes and delay their access to the open market.
Lauterman, who is an active anti-tobacco advocate and the recipient of $128,250 in campaign contributions from Pharmaceuticals/Health Products companies, is not alone here though. According to WTBW out of South Carolina:
the American Cancer Society Cancer Action Network, the American Heart Association, the American Lung Association and the Campaign for Tobacco-Free Kids applaud Senator Frank Lautenberg of New Jersey’s call for the Food and Drug Administration to exert its authority and immediately remove e-cigarettes from the market.
The Tide is Turning
Despite the past effectiveness of embedding legislation which benefits the current leaders of industry in otherwise popular legislation, this one could face some hurdles.
For instance, David Sweanor, who has worked with many health regulators including the WHO, said in a recent interview, “If there is anyone who believes cigarettes are no more hazardous than e-cigarettes I'd recommend a remedial course in basic sciences.”
And then there’s Dr. Joel Nitzkin. He is the Chair of the Tobacco Control Task Force for the American Association of Public Health Physicians, recently sent a letter to Senator Lautenberg. In it Nitzkin states, “As best we can tell, on the basis of currently available research data, these products [including but not limited to electronic cigarettes] promise a risk of illness and death well under 1% of the risk posed by cigarettes.”
So there is some support for the e-cigarettes to be allowed to be sold. For the time being, this is still a risky place to invest in due primarily to the potential government regulation.
The only thing that somewhat resembles a pure-play on e-cigarettes I’ve been able to find is Ruyan Group (HK:0329). This is the company which has been making e-cigarettes in China and owns most of the patents for e-cigarettes. It also licenses them to international manufacturers. It recently inked a deal with a media company in China to help get the word out to some of China’s 350 million smokers.
On the bad side, it’s a highly illiquid penny stock traded in Hong Kong (it last traded for HKD 0.187). It hasn’t been immune from the economic downturn either. It expects to post a loss when its next report is filed with regulators.
Also, there are dozens of smaller private competitors which have popped up all around the world (and will likely continue to do so). And it has other businesses so it’s not a 100% pure play on the growth of e-cigarettes. So, at this point in time even without the political risks involved, it’s a heck of a risky position to take.
In the end, this is the perfect situation of how a new technology could revolutionize an entire industry.
The established firms are going to pull what strings they can to prevent competition, but they’ll only be able to hold out so long. People want to quit smoking and in countries where e-cigarettes have been outlawed (e.g. Canada) that hasn’t stopped folks from buying them. Change will likely come regardless of the regulation. The regulators just determine who the winners will be and determine when change will be “approved”.
The opportunity in e-cigarettes is astounding (although, I’m holding off a bit to see how the politics plays out a bit further) opportunity to invest in a new cost-saving technology which is sure to be in very high demand.
It’s the perfect example of how change brings great opportunity. At the Prosperity Dispatch we’ve been focusing on emerging technologies like this for a while. Everything from stem cells to human genome applications to viable alternative energy technologies and everything else which have years and years of growth ahead of them as they change the entire landscape of their industries. Now we can add e-cigarettes to the list of “disruptive technologies” to keep an eye on.
Disclosure: Author has no position in any of the stocks mentioned