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The FDA's New Ruling

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By Rupert Hargreaves: May 6, 2014

The FDA's New Ruling Could Be Good News For The E-cigarette Industry

Electronic Cigarettes or E-cigs, have been one of the most disruptive technologies to hit the tobacco sector in recent years. The market for them has grown rapidly, and many smokers are now switching to the e-cig over traditional, more harmful cigarettes.

Unsurprisingly, this rise to fame within the smoking community has sent tobacco players such as Altria Group (NYSE: MO), Reynolds America (NYSE: RAI), and Lorillard (NYSE: LO) into a sort of e-cig arms race.

However, one of the industry's major concerns has been the threat of regulation by the FDA. Luckily, the FDA has recently come out and revealed that it will be making a move on the industry, but initial indications imply that impending regulation could be a good thing.

The FDA's Plan - The FDA has purposed to extend it's reach over the tobacco industry to include the $3 billion e-cig market. The FDA wants rules introduced that will ban sales to minors, free samples, and require nicotine addiction warnings.

The FDA is making this move as it has been claimed the use of bright colors, TV advertisements, and music festival sponsorships have been designed to attract youth, whose use of e-cigs doubled their use of e-cigs during 2012 from the years before. Data from 2013 is not yet available.

Mitch Zeller, director of the FDA's center for Tobacco products, commented on the proposal: For the first time there will be a science-based, independent regulatory agency providing gatekeeping.

However, it would appear that many industry participants are excited about the FDA's involvement in the market.

E-cigs main target market is ex-smokers, many of whom will be used to the existing limitations placed on traditional cigarettes. The new regulations for e-cigs will be no different.

What’s more, e-cig companies actually appear to be upbeat about the new regulation. For example, the president of Vapor Corp commented: I didn't see anything in the proposal that would appear to prohibit growth...The things that have come out are things that are going to enhance public opinion of the product and continue to legitimize us and there's going to be a good comfort level now that the FDA has stepped in.

Additionally, Lorillard (the third largest tobacco company in the United States and owner of Blue e-cigs, the leading U.S. electronic cigarette company) issued a press release on the decision applauding the FDA's decision to step in and regulate the industry.

It would seem as if the FDA's move to introduce some regulations for e-cigs is welcome by all. It is generally considered that FDA involvement will reduce consumer concerns over the safety of the product.

This is great news for all e-cig companies, but Altria and Reynolds American in particular stand to benefit.

National rollout..... Both Reynolds and Altria are planning national rollouts of their e-cig products during the next few months. It is likely that these that these rollouts, combined with the free publicity from the FDA's announcement, will add a kick to sales.

While Lorillard has been chasing market share during the past year, both Reynolds American and Altria have been testing their products in single states. This has allowed them to identify consumers' needs and wants before committing themselves to National rollouts. In Particular, Reynolds has developed the VUSE digital vapor cigarette which it has rolled out in Colorado, and VUSE has quickly become e-cig product of choice.

This initial success should be extremely worrying for Lorillard. VUSE appears to have been very successful. If it can replicate the success seen in Colorado, when Reynolds rolls it out nationally later this year, Lorillard’s first-mover advantage could be under threat.

What's more, industry giant Altria will also begin the national rollout of its e-cig product during the second quarter of this year. Just like the product Reynolds, its initial sales within the trial states have been impressive.

Keeping Quiet: Altria's e-cig offering comes in the form of the MarkTen brand, which the company rolled out in the middle of last year. Until recently, Altria has kept quiet about its initial sales, which implies less than -impressive results. However, Altria's management broke its silence during the fourth quarter conference call to reveal that the products initial sales have exceeded expectations.

Additionally, within just seven weeks, Mark Ten achieved brand leadership by taking a market share of 48% within the trial market. Altria intends to leverage lessons learned from its rollout when it commences national distribution during the second quarter of this year. Altria's existing dominance in the traditional cigarette market will also allow the company to gain distribution and customer awareness faster than its peers.

Altria also recently acquired Green Smoke, an e-vapor business, to boost its e-cig offering. Green Smoke has been manufacturing and marketing high-quality premium products since 2009, so it knows the market well. The acquisition will booster Altria's already-strong e-cig development and sales team, and will also expand Altria's product portfolio to address adult smokers' and vapers' different product preferences.

Foolish Summary: This is yet another development in the still young e-cig market. It would appear that this move by the FDA will only strengthen e-cig awareness and customer understanding of the product. This is great news for Reynolds and Altria, at a time when both companies are undertaking national rollouts of their e-cig products.

All in all Reynolds and Altria stand to benefit from this FDA ruling. So does a wider e-cig industry, although Reynolds and Altria are in the best position to profit.

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