Fitch: Proposed E-Cigarette Rules Will Not Stifle Growth

NEW YORK--()--Proposed deeming regulations from the U.S. Food and Drug Administration (FDA) will not impede growth prospects for the nascent E-cigarette market; however, Fitch Ratings is cautious that the new proposal may be the foundation for broader regulation in the future.

Fitch sees E-cigarettes providing a compelling source of diversification for tobacco companies with potential to reverse secular declines over the long term and we believe that strict government regulation could hinder growth of the promising category. E-cigarette sales for the U.S. marketplace, the world's largest, exceeded $1.5 billion in 2013, compared to less than $10 million in 2007. Demand, mainly from current tobacco users, has essentially doubled every year since the first E-cigarette products were introduced in 2006.

Under the FDA proposal, a federal minimum age limit of 18 to purchase the vapor products would be set as well as regulations regarding the definition and consistency of E-cigarette ingredients. However, the regulatory agency left advertising, flavorings, and online distribution untouched, which will prove to be beneficial for smaller players that rely on internet distribution rather than the retail channel. The FDA seeks public comment over the next 30 days for its new regulations of the currently unregulated vapor cigarettes. Despite the new rules, there are still legitimate concerns relating to the lack of understanding of the long-term effects on individual health of inhaling the small number and amount of ingredients in the products that may be the basis of further regulation as more information arises.

In addition, under the proposal, manufacturers will be required to file regulatory applications over the next two years for presently-marketed vapor products. Higher capitalized firms (including Big Tobacco companies Lorillard and Altria), will be best positioned to handle the incremental costs to obtain regulatory approval. On the other hand, smaller firms may be forced into consolidation with the bigger players in order to survive. While the proposed FDA rules alleviate regulatory uncertainty to the product category, the industry is awaiting state and federal decisions on taxation of E-cigarettes that could limit their cost advantage compared to traditional tobacco cigarettes.

For more information on this topic, please see our special report titled, "E-Cigarettes: A Glowing Marketplace," available on our website www.fitchratings.com

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Michael Zbinovec, +1 312 368-3164
Senior Director
Corporate Finance
or
Kellie Geressy-Nilsen, +1 212 908-9123
Senior Director
Fitch Wire
Fitch Ratings, Inc.
One State Street Plaza
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or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Michael Zbinovec, +1 312 368-3164
Senior Director
Corporate Finance
or
Kellie Geressy-Nilsen, +1 212 908-9123
Senior Director
Fitch Wire
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com