Tobacco Companies Pursue More Vapor Innovations

Source from:  Winston-Salem (NC) Journal  10/13/2014

Selling innovative products and making money while the getting is good is the mantra of small independent electronic cigarette manufacturers.

As the industry, politicians and anti-tobacco advocates awaits e-cig guidelines from the Food and Drug Administration, two companies – Logic and Fin – are moving forward with advancements in their personalized vapor products.

Lorillard Inc. is preparing to launch Nov. 10 its latest version of blu eCigs, called blu plus.

Reynolds American Inc., which is pinning its hopes on the Vuse e-cig brand, is pursuing Federal Trade Commission approval of its $27.4 billion offer for Lorillard. Reynolds would sell blu eCigs and its 41 percent U.S. market share to Imperial Tobacco Group PLC in a related $7.1 billion deal.

Traditional e-cigs are battery-powered devices that heat a liquid nicotine solution in a self-contained disposable cartridge and create a vapor that is inhaled. The manufacturers have provided few flavor choices, in part in expectations that the FDA would limit flavorings as it does with combustible cigarettes.

By comparison, vapor products can feature a liquid capsule that is inserted into a cartridge, known as an open-system format. Vapors offer consumers a wider variety of flavors, included fruits and candy.

The FDA began regulating tobacco products and marketing in June 2009, but it does not have the authority to ban nicotine or tobacco. A Wild, Wild West environment has emerged in the absence of FDA e-cig regulations, such as vape shops that have mushroomed in the Triad and across the country.

Industry observers say much of the nicotine liquid for the open systems is made in China or in unregulated vape shops. The World Health Organization said in August it has concerns about the ability to manipulate the vapor products to insert liquid compounds other than nicotine solutions.

Logic, Fin and blu eCigs are trying to resolve the issue by providing vaping alternatives in an enclosed cylinder.

Wells Fargo Securities analyst Bonnie Herzog labeled Logic Pro as the "most sophisticated vapor product available." It provides pre-filled, vacuum-sealed capsules. Its e-liquid refills are sold in packs of one and five, and features two tobacco and one menthol flavor.

"The consumer can switch flavors without fully consuming a flavor capsule, which is a nice feature, building on the consumer customization trend," Herzog said.

Herzog said blu plus features a battery that lasts twice as long as its current rechargeable kit batter, and recharges twice as fast. It features a new tank system that holds more nicotine liquid than its original cartridges.

"Overall, this new product launch appears positive considering it should bridge the performance gap between blu's cig-a-like e-cig and high-performing vapor products on the market today," Herzog said.

Herzog said Logic Pro and blu plus products "seek to address shortcomings of traditional e-cigs including inconsistent performance, insufficient vapor volume and weak draw/batteries." Reynolds claims Vuse addresses those issues.

The stakes over the e-cig vs. vapor debate could be significant financially, as well as industry changing.

Herzog estimated overall U.S. e-cig revenue reached $2 billion in 2013. She projects it will increase up to $10 billion by 2017.

She predicts Reynolds will have $4 billion in revenue from e-cigs in 2021, compared with $3.9 billion from conventional cigarettes. That's compared with barely any e-cig revenue and $6.4 billion in conventional cigarette revenue for 2013.

Herzog said she is "very encouraged" by the Logic and blu eCig products and "expect them to re-accelerate growth in the convenience store vapor product category."

"Logic Pro and blu plus should be appealing to retailers because they could help them re-gain traffic from vape shops and drive continued traffic given the razor/blade model behind these products, assuage any fears about product safety given these products are sealed/closed; and offer margins that are three times as high as combustible cigs," Herzog said.

Gregory Conley, a research fellow with the right-leaning Heartland Institute, said he expects vapor products prefilled with e-liquid "to rapidly become the preferred brands at convenience stores."

"Nonetheless, e-liquid sales should continue to grow in both convenience stores and vape shops as consumers seek out more flavor variability and a stronger vaping experience. The idea of selling prefilled liquid tanks is not new. The fact it took this long for someone to introduce the idea at mass market retail is surprising."

Howard said Reynolds is focused on the national expansion of Vuse.

"Early feedback from consumers and retail partners has been very positive," Howard said.

Herzog said Vuse and MarkTen, the e-cig brand of Altria Group Inc., have captured a combined 29 percent of the national convenience-store market share even though they only began their national rollouts this summer.

"Innovation in everything we do is a key driver of our transformation strategies, and will continue to be moving forward," Howard said. "However, I would not begin to speculate on anything we may or may not be considering regarding product innovations down the road."

Scott Ballin, past chairman of the Coalition on Smoking or Health, said the "heavy marketing of technology advances and safety are what will possibly give these products an edge in what continues to be a very competitive market place."

"Changes in the entire marketplace seem to be occurring almost on a daily basis, and it seems each of the major companies is trying to stay one step ahead."

Reynolds has recommended to the FDA that it ban the use of open-system vapor cigarettes because they "create unique public health risks."

Conley projects that the Logic and blu plus products "would likely receive the Reynolds seal of approval because they are not refillable."

"However, savvy consumers are unlikely to have any issues modifying these non-refillable tanks to be refillable."

Ballin said he expects the FDA to place severe restrictions on the open-system vapor products.

"The lack of regulatory oversight over the vapor liquid tanks may back the FDA into that stance since otherwise, you open a whole can of worms on what can go into those tanks," Ballin said.

"The FDA also needs to step in to say that not all e-cigs are OK, and not all of them should be on the market." Enditem