Brought to you by: MOO
The Food and Drug Administration is not going to stand in Madison Avenue's way when it comes to the marketing of e-cigarettes.
That was the message the FDA sent Thursday, when after four years of deliberation the agency proposed assuming regulatory control of the $2 billion e-cigarette industry. It described only a handful of new rules it would enforce, regulations that analysts said will have little effect on the industry's trajectory -- including the marketing dollars pouring into e-cigs.
Notably, the FDA did not weigh in on advertising restrictions. That means the TV commercials, radio spots, print ads, billboards, NASCAR sponsorships and other campaigns will continue. And it's a stark departure from expectations last year, when analysts and some industry insiders assumed the FDA would try to knock e-cigarette commercials off the air and set other boundaries. Last fall, a tobacco industry analyst referred to a TV ban as a "no brainer."
On Thursday, Sen. Richard Blumenthal, Democrat of Connecticut, called the FDA's proposals "timid and tepid," according to U.S. News and World Report.
"It's going to get a lot of people upset," said Jason Healy, president of Blu eCigs.
"From a marketing perspective, I think this is great," he added, praising what he called the FDA's science based approach. "It's a cautious approach and not a knee jerk reaction," he added.
The lack of rules on e-cigarettes so far has allowed brands like Blu, NJoy and others to advertise on TV -- something traditional cigarettes have not done since Congress banned the practice in 1971. Their marketing tactics have resembled Big Tobacco's old strategies, using celebrities like Jenny McCarthy to endorse their products and running commercials glamorizing the product. The proposals issued today won't change any of that even if adopted.
The FDA also opted to not ban e-cig flavors or internet sales. It did propose a ban on sale to minors, which e-cig makers and anti-smoking groups both praised, and distributing free samples. If the rules are adopted, e-cig makers will also need approval from the FDA before rolling out a new product and give the agency a list of ingredients in the product. Health warnings will be required, explaining that nicotine is addictive.
$46.8B Record U.S. agency revenue in 2015
It remains unclear, however, whether Thursday's announcement from the FDA will encourage more advertising around e-cig products. "As it stands right now, there are no plans to increase or decrease our level of advertising," Mr. Healy said.
A report this month from Sen. Richard Durbin, Democrat of Illinois, said the largest e-cigarette makers spent nearly $60 million combined on advertising and promotion, with marketing budgets at some e-cig companies growing by more than 100% year over year. NJoy said it plans to spend $30 million marketing its product in the U.S. this year.
Blu, which is owned by Lorillard, is the largest e-cig brand, with more than 40% of market share. NJoy follows Blu with about 20% of the market. There are a number of other smaller vendors, many of which sell their wares on the internet. Altria and Reynolds America, the two largest tobacco companies, have said they will roll out their respective e-cig products nationwide this year. Both companies are testing their products in select states.
The FDA is allowing a 75-day comment period on the new regulations, a more than 200-page document. But the rules likely won't take effect for another two years, which adds another touch of uncertainty to the question of e-cigarettes. "Whoever had planned on investing in the space has done so," said Cynthia Cabrera, executive director of the Smoke-Free Alternatives Trade Association, an industry group representing some of the e-cig companies. "Maybe companies that are already entrenched will up their ad game, but I doubt that any new ones will jump into that space."
The new rules could hurt smaller companies trying to enter the space because they will have to wait for the FDA to approve their product before rolling it out. One e-cig startup that had lined up an investor told Ms. Cabrera on Thursday that the backer was getting cold feet because of the FDA's move.
Either way, the two-year window will allow for the industry to continue to grow, according to analysts. Michael Lavery, analyst with CLSA Americas, said in a research note Thursday that such restrictions are "benign" and "reasonable."
"The rules are likely to take effect in two years -- a long time for an industry that just gained relevance two years ago with Lorillard's purchase of Blu e-cigs," he wrote Thursday.
"This is the moment of truth" for the e-cigarette industry, Citi analyst Vivien Azer said in an interview last December. "Whether it becomes a truly viable category."