US e-cigarettes: a future worth investing in?

By Rohaan Kumar | 29th March 2020

The US e-cigarette market is in the midst of fundamental changes that will vastly impact its future. New regulations, aiming to increase administrative control over the industry, and rapidly developing consumer preferences have presented both opportunities and risks to the market valued at US$4.2 billion(bn) in 2019.

Currently, the US is the biggest market for e-cigarettes and is expected to grow by 24.1% from 2019 – 2027, due to surging demand from millennials. However, with one in 4 American high schoolers vaping, along with 38 deaths from vaping related illnesses, a market seeing unprecedented growth in the past will be facing questions from investors about its survivability.

This alarming trend has heightened regulatory scrutiny. For e-cigarette manufacturers, opportunities are being axed with bans on certain unauthorised flavoured cartridges. The Food and Drug Administration (FDA) is also requiring all producers to submit a Premarket Tobacco Product Application (PMTA) by May, detailing more about the physical aspects of a product alongside potential benefits and drawbacks.

Required for each product, with FDA cost approximations of $466,000, market players will be faced with more hurdles on the road to profitability. Exacerbating circumstances, firms such as Altira and Swedish Match have stated that these costs were in the millions. This is a nightmare in the making for smaller market players, who will potentially declare bankruptcy as they struggle to achieve regulatory approval.

Special attention was drawn to US market leader Juul Lab Inc as they face the brunt of the blame for the current youth vaping epidemic, with the FDA probing into the firm’s activity. Alongside this, the number of lawsuits against the e-cigarette manufacturer has increased by 80%, creating great uncertainty for investors.

With these actions proving expensive for Juul, long gone are the days where the private company was known as one of the fastest-growing in the world.  Tobacco giant Altira has written down $4.8bn of its $12.8bn investment into the company, reducing its valuation from $38bn in 2018 to a now more conservative $12bn.

In response to this, Juul has turned to the debt market, raising $700 million to cover costs. Ongoing regulatory scrutiny has also prompted further action, as the company has cut 650 jobs in an attempt to reduce spending by $1bn.

In efforts to widen their customer base, Juul has made a questionable move by pitching a switching program to native tribes in the US, granting natives to have access to their $50 e-starter pack for only $5. Not only is this demographic renowned for their economic struggles, but they also have a disproportionally high level of nicotine users compared to the rest of the population. Many see this as a marketing ploy to reel in more suggestible customers due to their main market losing traction from the numerous legal and regulatory battles they face.

With all eyes on Juul, another tobacco giant, Phillip Morris, may have found an opportunity in the market. They produce an e-cigarette known as the IQOS, and unlike Juul, have received FDA approval to market their product to adult smokers. Learning from the competition, they have adopted a safer approach, screening customers at retail stores to verify their age and whether they are active smokers.

Presently, in the US, IQOS is only available in two cities, Atlanta and Richmond, Virginia. However, the product boasts 13.6 million users around the world, with an increase of 4 million from a year ago, providing a more positive growth outlook.

Phillip Morris also estimates that 71% of customers have stopped smoking permanently and switched to the device, a likely boost to investor confidence regarding the market’s future. Growth of the IQOS in the US is supported by success in Japan, Russia, and Europe, where the volume of sales in the first 3 quarters of 2019 (42.6 million) surpassed the full-year figure for 2018 (41.4 million).

Ultimately, the outlook for the US E-cigarette market is more uncertain than distressing. Juul is still in the limelight as stakeholders speculate on their ability to navigate through tighter regulations, as well as pressing lawsuits.

Faced with the need to raise greater capital due to the PTMA, smaller competitors could potentially be deterred from entry. However, the growing success of Phillip Morris are proving E-cigarettes can satisfy both regulators and consumers. It’s only a matter of time before others start to jump on the bandwagon, creating and marketing their products in a more sensible way, once again boosting the industry’s growth prospects.