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US E-Cigarette and Vapor Markets: Days are Numbered for this Billion-Dollar Industr y

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Once thought of as a niche product, electronic or “e-cigarettes” and vaping products
have taken the tobacco industry by storm. E-cigarettes come in both a disposable or
rechargeable form with the look and feel of a more traditional cigarette. Vapor products differ in that they offer increased customization with the varying heat settings, e-liquids, oils and various herbs. Multiple public reports have e-cigarettes surpassing traditional tobacco sales within the next six to ten years if growth rates continue to climb. Due to the lack of Food and Drug Administration (FDA) regulation, e-cigarette year-over-year growth declined from 2010-2012 (Exhibit 2) due to a large influx of products resulting in overall market saturation. However, growth rates in 2013 picked up again as big tobacco companies entered the market with new product launches or mergers and acquisitions.

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US E-Cigarette and Vapor Markets: Days are Numbered for this Billion-Dollar Industr y

  1. 1. All rights reserved © 2014 Frost & Sullivan | www.frost.com E-Cigarette and Vaping Markets Once thought of as a niche product, electronic or “e-cigarettes” and vaping products have taken the tobacco industry by storm. E-cigarettes come in both a disposable or rechargeable form with the look and feel of a more traditional cigarette.Vapor products differ in that they offer increased customization with the varying heat settings, e-liquids, oils and various herbs. Multiple public reports have e-cigarettes surpassing traditional tobacco sales within the next six to ten years if growth rates continue to climb. Due to the lack of Food and Drug Administration (FDA) regulation, e-cigarette year-over-year growth declined from 2010-2012 (Exhibit 2) due to a large influx of products resulting in overall market saturation. However, growth rates in 2013 picked up again as big tobacco companies entered the market with new product launches or mergers and acquisitions. Market Implications of BigTobacco’s Arrival Big tobacco may have been late to the game, but has made up for lost time with its multi- billion dollar budgets, increased marketing and advertising efforts, brand recognition, as well as robust manufacturing and distribution capabilities. One of the most valuable assets large tobacco companies bring to the industry is FDA familiarity and expertise. Lack of government oversight has inadvertently assisted in the creation of multiple e-cigarette products that did not undergo the rigorous regulatory approval that is in place for traditional tobacco products. With pending FDA regulation, big tobacco will be able to more easily absorb the increased costs associated with receiving review and approval. Between 2013 Vital Signs October 2014 Industry Focus Advanced Medical Technologies Tara Shelton, Research Analyst US E-Cigarette and Vapor Markets: Days are Numbered for this Billion-Dollar Industry
  2. 2. 2 All rights reserved © 2014 Frost & Sullivan | www.frost.com and 2014, there were 50 e-cigarette complaints filed with FDA, and the Center for Disease Control (CDC) reported that the number of e-cigarette calls to the poison center rose from one per month in 2010 to 215 per month in 2014. While there are many advocates promoting e-cigarettes as a healthier alternative, critics argue that such evidence has yet to be scientifically proven. Exhibit 1 1963 Herbert A. Gilbert filed a patent in US for a device that heats the nicotine solution to produce steam and involves replacing burning tobacco and paper. However, it was never commercialized. 2003 An electronic atomizing cigarette functioning as non-combusting tobacco-smoking substitutes was invented by Hon Lik, a Chinese pharmacist. 2007 E-cigarettes introduced to the US market. 2009 FDA released laboratory study on e-cigarettes and began to monitor foreign shipments. 2011 US Court ofAppeals decided that e-cigarettes are not drugs or devices unless marketed for therapeutic purposes. Authority on regulation is given to the FDA. 2012 Major tobacco companies are now viewing e-cigarette as a new growth engine for their declining business and are beginning to proactively participate in M&A activities. In 2012, Blu, a leading e-cigarette company in US, was acquired by Lorillard, the third largest tobacco manufacturer in US. 2004 Ruyan Products, named by Hon Lik after the electronic cigarettes he invented, was introduced to Chinese domestic market in 2004 and exported to overseas market in 2005. New Jersey added e-cigarettes to the current smoking ban, spurring similar actions from cities like Los Angeles,NewYork, Boston and Chicago in the coming years. 2010 In late 2010, US federal appeals court required FDA to regulate e-cigarettes as tobacco products, rather than as medical devices or drugs. Boosted by this favorable ruling, e-cigarette makers began to extend their presence in the country. 2014 In April 2014, the US FDA issued proposed rules that would ban sale of e-cigarettes to anyone younger than 18 and require companies to list ingredients. Altria Group Inc. plans to expand sales of its MarkTen e-cigarette nationally beginning in 2014. 2008 WHO rules that e-cigarettes should not be considered a smoking cessation aid. Source: Frost & Sullivan Healthier Alternative or Unforeseen Ramifications The e-cigarette and vaping trend continues to boom without substantial scientific research on the device or related health risks. Advocates include more than 50 public health specialists and researchers who all signed a letter asking the World Health Organization (WHO) to “resist the urge to control and suppress e-cigarettes.” They believe it is a low-risk substitute for smoking that “could be among the most significant health innovations of the 21st century —perhaps saving hundreds of millions of lives.” Advocates argue unnecessary regulation before evidence collection could potentially slow e-cigarette’s contribution to ending tobacco-related diseases. Critics recently received support from WHO, which suggested that e-cigarettes and vapors are a public health threat and should be regulated more closely.With younger generations and first-time smokers being the largest consumer of e-cigarettes, proposed regulations on sales to minors and restricting the use of fruity or sweet flavors could greatly impact overall sales volumes.The long-term biological effects on users or for those who may be around them have yet to be determined, but increased regulations could result if negative outcomes are published. According to the CDC,the number of high school students who have used e-cigarettes rose from 79,000 in 2011 to 263,000 in 2013.This could be attributed to the social factor or enjoyment of the variety of sweet-tasting e-liquids currently offered. Research has been limited on future smoking habits, but a recent study published by the New England Journal of Medicine called e-cigarettes a “gateway drug” for other addictive substances such as nicotine or illicit drugs.
  3. 3. 3 www.frost.com | All rights reserved © 2014 Frost & Sullivan v i ta l s i g n s Exhibit 2 - US E-Cigarette Market Revenue Market includes disposable and rechargeable e-cigarettes U.S. ($M) YOY Growth (%) 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 0% 50% 100% 150% 200% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Frost & Sullivan Are the Days of E-Cigarette’s Numbered? While the FDA regulators and big tobacco companies try to play catch up,the recent initiative fromWHO will further pressure US regulators.There is no current information to suggest that this industry will evaporate, even with the harshest regulations, but impending government guidelines along with long-term clinical health research will greatly affect the future of the e-cigarette market. It has the ability to continue flourishing and eventually surpass the traditional cigarette market, or it will gain negative scrutiny and become synonymous with them. The days are numbered for this billion-dollar market as proposed regulations for this freely available and unregulated product may become as stringent as legislation for traditional cigarettes. Exhibit 3 Increasing Need for Innovation LargeTobacco Companies Gaining Market Share Increasing Regulations & Restrictions Lack of Empirical Evidence and Long-Term Data Nicotine Replacement Therapy Diversified Consumer Market Denotes Current Impact Denotes Long-Term Impact DriversRestraints DriversRestraints Source: Frost & Sullivan
  4. 4. The Frost & Sullivan Healthcare team offers extensive coverage of the following markets and sectors: CUSTOMIZED SERVICES Growth Consulting ­ Clients may leverage our unique combination of market expertise, global presence, and relationships with key industry players for customized research, business strategy, consumer analysis, and organizational development projects. Clients get powerful and practical solutions to address their unique challenges and develop winning strategies for growth. The Frost & Sullivan Healthcare Group specializes in closely monitoring the healthcare marketplace to provide critical information, opportunities, and strategic recommendations for market participants. Our global team of highly skilled industry analysts and consultants are educated and experienced in a variety of healthcare market sectors, and maintain well- developed, long-standing relationships with key industry participants. Leveraging these assets, the team provides clients with comprehensive industry knowledge, including detailed coverage of market, technology, economic, and customer-focused trends and forecasts. Life Sciences Ensuring clients have the tools to succeed in the new era of personalized medicine • Convergence of Therapeutics/Diagnostics • Pharma Pipelines • Next Generation Biologics • Vaccines • Life Science ResearchTools • Next Generation Sequencing Contract Outsourcing advanced medtech Enabling efficient and outcomes oriented healthcare delivery • Medical Imaging Modalities & Services • Contrast & Radiopharma • Surgical & Orthopaedic Solutions • Infection Control Solutions • Wound Management • Patient Monitoring Solutions • Ventilation and Anaesthesia • Sleep Diagnostics &Therapy connected health Defining how information technology improves patient care, operational efficiencies, and cost control • Provider InformationTechnology • Analytics • Health Information Exchange • Revenue Cycle Management • Telehealth • Remote Monitoring • VideoTelemedicine • mHealth Greg Caressi SVP, Healthcare & Life Sciences t) 650.475.4555 e) gcaressi@frost.com Daniel ruppar Research Director Healthcare & Life Sciences t) 210.247.2428 e) daniel.ruppar@frost.com Reenita Das Partner, Sr. Vice President Healthcare & Life Sciences t) 408.857.9386 e) rdas@frost.com Customer Research Clients gain insights into their customers’ behaviors and attitudes, find out what end-users think of their company, and how their products should look and feel in the future.These analyses are designed to assist you in formulating and applying effective product marketing strategies across your product and service lines.

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