Regulatory Transactions

From: Bloomberg

By Anna Edney

The $1.5 billion U.S. electronic-cigarette industry has tripled sales this year with the help of TV ads, Nascar sponsorships and product giveaways. Government regulation may now threaten those marketing tactics.

The Food and Drug Administration is set to decide this month whether to lump e-cigarettes in with conventional smokes as part of its oversight of the $90 billion U.S. tobacco market. Such a step would set the stage for greater restrictions on production, advertising, flavorings and online sales.

With at least 40 U.S. states seeking stricter rules and federal health officials raising the alarm about e-cigarette use by children, manufacturers of the smokeless devices are preparing for a FDA crackdown.

“We do anticipate becoming a regulated industry, so it is very possible the way in which we advertise will change,” said Andries Verleur, co-founder of e-cigarette maker VMR Products.

E-cigarettes heat liquid nicotine into an inhaled vapor without the tar of normal cigarettes. For the moment, marketers operate with few, if any, of the regulatory limits that apply totobacco companies such as Philip Morris USA and Reynolds American Inc. (RAI) TV advertisements by tobacco companies were banned in 1971, and in 2010 the FDA eliminated cigarette sampling. Sporting leagues such as Nascar also have severed ties.

With the FDA seeking to expand its regulatory authority beyond conventional cigarettes and smokeless tobacco, some e-cigarette companies are opening up the marketing spigot while they still have a chance.

Nightclub Push

Victory Electronic Cigarettes Corp. (ECIG), run by the same marketing executive who helped build InBev NV into a dominant brewer, is handing out 1 million e-cigarettes starting this month at events in 50 U.S. cities. There will be a traveling van and tents at Nascar races, said Chief Executive Officer Brent Willis, who was once the president of InBev’s Asia-Pacific operations and helped introduce the Kraft brand to China.

Logic Technology Inc., which makes up 17 percent of industry sales, plans a push in Manhattan bars and nightclubs this year or early 2014.

“You go where adult smokers are,” said Miguel Martin, president of Livingston, New Jersey-based Logic, in an interview.

The industry says e-cigarettes are a healthier, cleaner alternative to traditional smoking. Many disagree. At least 40 U.S. state attorneys general on Sept. 24 urged the FDA to immediately regulate the sale and advertising of electronic cigarettes in a letter that said the products are appealing to youth and no one is “ensuring the safety of the ingredients.”

Child Addicts

That followed a Sept. 5 report in which the Centers for Disease Control and Prevention raised an alarm about children getting hooked on nicotine. The CDC found the share of U.S. students in middle school and high school who used e-cigarettes doubled to 10 percent in 2012 from 4.7 percent a year earlier.

By comparison, adolescents who reported smoking regular cigarettes daily or more casually, declined to 8.3 percent in 2010, from 11.9 percent in 2004, the Substance Abuse and Mental Health Services Administration said earlier this year.

Senator Dick Durbin of Illinois and 11 other Democrats, seized on the report to call for immediate FDA regulation and to demand that e-cigarette companies provide documents related to sales, labeling and marketing of their products to children.

“Despite claims from some e-cigarette makers that they do not market their products to youth and that kids should not have access to their products, e-cigarette manufacturers appear to be applying marketing tactics similar to those used by the tobacco industry to hook a new generation of children,” the senators wrote in a Sept. 26 letter to e-cigarette companies.

FDA Agenda

The FDA has oversight over the cigarette market under a2009 law that gives it sway over manufacturing, marketing and other tobacco industry practices. The law permits the FDA to determine whether it will extend its reach to related products.

In a government catalog of upcoming federal regulatory actions, called the Unified Agenda, the FDA lists October 2013 as the deadline for issuing a notice for proposing such rules.

The FDA has sent a proposal to the White House Office of Management and Budget, seeking to expand its regulatory authority beyond cigarettes, Steven Immergut, a spokesman for the agency said in an e-mail yesterday. “Their review will begin when the government shutdown ends,” he said.

Industry Standard

Matthew Myers, president of the Campaign for Tobacco-Free Kids, said everyone is watching to see precisely what the FDA has proposed.

“Sometimes OMB takes weeks and sometimes OMB sits on things for a very long time,” he said in an interview. “I don’t think this is something the OMB plans to sit on.”

E-cigarette companies are on board with manufacturing standards and age restrictions while saying advertising limits shouldn’t be on the table. VMR’s Verleur said his company, which makes the V2 Cigs brand, and his competitors have asked the FDA for meetings to give their side of the argument.

“One thing that would be very bad is to lump us in with traditional cigarettes and apply some of the same standards,”he said.