E-cigarettes boom: is there really cash in vapour?

IF THE DEVIL gets all the best tunes he also gets more than his fair share of the best money-making opportunities. "Sin" stocks – fags, booze, guns, gambling – consistently outperform the more saintly, and by far the most reliable of all has been Big Tobacco. There's nothing like an addict to secure repeat business and there are currently more than a billion of them puffing away globally. 

Hence the giant investment pull of e-cigarettes. From a standing start in 2007, they have been storming on so effectively that even Big Tobacco is running scared.

Current sales, expected to hit $1bn in 2013, are a fleck of ash compared to the $750bn generated by traditional smokes. But what counts is growth. The market has doubled over the past year, even as "vaping" etiquette guides have multiplied and celebrity investors have got stuck in. In June, Sean Parker – the Napster founder and early Facebook investor – took a $75m stake in America's bestselling brand, NJOY.

The turning point for many leathery tobacco executives was a note penned last year by Bonnie Hertzog of Wells Fargo which predicted that sales could overtake combustibles within a decade. Take that Nick O'Teen! Actually, don't worry about it. The whole point of e-cigs, after all, is that they deliver the nicotine hit on the lungs that smokers crave, without the really toxic smoke and tar.

That selling point alone has convinced the industry that this is a battle to join rather than fight – and recent months have seen a scramble for market positioning. Lorillard led the way with its $135m purchase of the second-largest US brand, Blu eCig. Reynolds (Camel, Pall Mall) is now selling its own Vuse range. And Marlboro-maker Altria (formerly Philip Morris) has launched a new line named MarkTen. The biggest player on this side of the Atlantic, British American Tobacco, is trialling a new brand, Vype, on the internet.

The big worry for the dwindling number of small indie players who created the market is that the big boys will use their distribution power to muscle them out completely. That also puts would-be investors in a fix. Apart from one listed player in the US – Vapor – there are now very few ways to bet on this smokin' new sector. You could of course hold your nose and invest via Big Tobacco, but that rather defeats the point.

Actually, it's a moot question whether e-cigarettes are really the go-go products they're cracked up to be anyway – not least because regulators haven't exactly been smiling on them. Although everyone agrees that vaping is far less dangerous than smoking, the risks haven't really been properly quantified. The chemical composition of different brands varies widely, but many are manufactured in China (in itself enough to give health campaigners the willies) and almost all include traces of the same chemical used in anti-freeze.

Those worries – combined with fears that e-cigs may act as "gateways" to the real thing to kids (the availability of chocolate and fruity flavours doesn't help) – have persuaded the UK government to decree that, from 2016, they'll be regulated as a medicinal product. Next month, the European Union looks set to follow suit.

American regulators are still sitting on the fence, but are likely to come under heavy pressure from Big Pharma, which has a vested interest in getting e-cigs safely behind the chemist's counter to preserve sales of established quitting aids like nicotine patches. All the additional licensing involved means another big headache for the sector's smaller players.

Beyond all that, though, there remains the basic question of demand. Are smokers really as enamoured with the idea of switching to e-cigs as the hype suggests? To non-smokers it's a non-brainer: enjoy the hit, without the likely death sentence. But that's completely ignoring the complicated psychology that drives some to dice with notions of risk and self-destruction.

We're told that 21 per cent of smokers have already bought some kind of electronic cigarette. A lot of these sales will have been driven by curiosity. Really hardcore tobacco users might also be doubling up: deploying e-cigs as a means of keeping cravings at bay in places where smoking is forbidden. But since airliners, train companies and now some cities are taking steps to ban them completely (Michael Bloomberg in New York being the most high-profile example), many smokers may wearily conclude, what's the point?

A backlash against these puritanical wowsers is now underway. As The Economist has pointed out, the campaign to "denormalise" smoking – by demonising even comparatively harmless products that mimic the process – risks the loss of many more lives. But these protests seem to be falling on deaf ears. Is Marlboro man heading into the sunset? Don't count on it. · 

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