Analyst Insight by Shane MacGuill, Analyst – Tobacco, Euromonitor International
It is, for some, a nightmare scenario with which one could imagine Milton Friedman terrorising his grandchildren: that of over-eager regulators choking off the growth of a free market solution to a free market engendered problem. With last week’s EU Parliament ENVI (Environment, Public Health and Food Safety) Committee vote on the Tobacco Products Directive, it is rapidly becoming a reality. There has been an outpouring of media coverage on the stellar growth potential of e-cigarettes in recent times which has for the most part obscured a trend towards the medicalisation, or prohibition of these products which threatens to render the most hyperbolic of these projections so much of yesterday’s click-bait. So, what is the current state of e-cigarette regulation globally and what implication does current regulatory thinking have for the future development of the industry?
Major regulatory decisions label e-cigarettes as medicines
While the final text of the EU Tobacco Products Directive has not yet been agreed, barring an unexpected reversal in September’s plenary session, it is likely to deem that all e-cigarette products, regardless of nicotine content, be classified as medical devices, meaning that they must undergo costly and lengthy clinical trials and sale will be restricted, in the main, to pharmacies thereby diminishing consumer access. This scenario, echoes (and in fact goes further than) guidance given in late June by the UK’s MHRA (Medicine and Healthcare products Regulatory Authority) that it would take on the regulation of e-cigarettes as medical devices, on the lines of the TPD and has encouraged manufacturers to begin medical licensing application processes. E-cigarettes are already treated as medical devices in New Zealand, South Africa, Sweden and Estonia, amongst other territorities.
The clear and present danger for the nascent e-cigarette industry is that a regulatory framework as substantial as the Tobacco Products Directive will act as a body of persuasional gravity of inescapable force and set the agenda for future regulation of the industry in other markets. The risk of the licensing approach, to the sector, centres on efficacy and access. Proponents of e-cigarettes argue that precisely because they are not operating under a medical rubric of ever-decreasing nicotine consumption, they are effective in bridging smokers away from combustible tobacco use. Medicalisation seeks to restrict nicotine content, in line with an honourable goal of eliminating its consumption, while it logically also places the distribution of such products in the hands of professionals, in the pharmacy channels. The end result, in the worst case, is narrower access to a product of fractional potency.
Hype surrounding e-cigarettes downplays or ignores many markets
The majority of current global e-cigarette sales come from the soon-to-be medicalised EU and the massive, as yet unregulated US market. The optimistic vaping frenzy which is sweeping the business media therefore rests to a large extent on the US market and appears by corollary to ignore developments elsewhere.
E-cigarettes are currently banned in several major cigarette markets such as Brazil, Japan and Mexico and there will be others to come. One might justifiably suggest that combustible tobacco is too important to governmental interests in other huge markets such as China, Indonesia and the Philippines for non-combustible e-cigarettes to be allowed to gain traction. China will happily manufacture the technology but I would suggest that its enthusiasm for e-cigarettes will, at least for the moment, exclusively manifest in the cheery waves it gives to exports leaving its shores.
In other markets, the health awareness and price incentive which drive growth in Europe and the US, are significantly weakened factors. E-cigarettes enjoy substantial use in South Korea but are taxed as heavily as tobacco products and see much less vertiginous growth rates. Indeed, it is not uncommon in Asia-Pacific for standard e-cigarettes to cost 5 to 10 times the price of an average pack of cigarettes.
Uncertainties still proliferate in US
There remains then in these cornucopian visions, a huge and by no means solid assumption – the robustness of the US market itself. Certainly, growth has been astonishing: the market roughly doubling in value every year since 2007 or 2008. With Altria rolling out its Mark Ten brand (why not Marlboro, one wonders?) all of the major players now have an e-cigarette. Some cities and states in the US (such as Boston and the proposed SB648 Bill in California) treat e-cigarettes as tobacco products, something which has its own share of restrictions but is on balance less damaging to long term development than medicalization.
However, the federal FDA has yet to rule on how these products will be regulated. It should not be forgotten that this is an agency which sought to ban the importation of e-cigarettes in 2009 and has consistently proven itself reluctant to engage in the harm-reduction dynamic. Deeming that Section 910 of the FD & C Act applies to e-cigarettes would make it illegal to sell any such product not on the market before February 2007 – a de facto ban. Short of such a nuclear measure any element of medicalization in the US would severely impair future growth, particularly given that the key to the category’s current success is its relatively wide distribution in the market.
Medicalisation may not benefit anyone
On a final note, a received wisdom appears to have grown up (perhaps made current by disgruntled supporters of e-cigarette liberalisation) that increased medicalisation is of benefit to the tobacco industry. This to me seems a short-sighted and erroneous view. In fact, from here it seems that medicalisation is prompted precisely by the existence of the tobacco industry. The e-cigarette clearly represents a dramatic, disruptive change in nicotine consumption but equally it is no more than a change in format and to a great extent, the tobacco industry has been here before – with the advent of Bonsack’s machine and the filter, amongst other innovations.
As an industry too, it has sought reduced harm alternatives, often comically but never without ambition and foresight. It is, in the final analysis, a nicotine industry and the e-cigarette (and all of the next generation of such devices) is merely a technologically advanced iteration of an age-old behaviour. It is one that from the industry’s point of view ought to be eagerly embraced and it appears that that is precisely what regulators and those who seek to minimise and eliminate nicotine consumption are planning for. Medicalisation risks dampening or reversing e-cigarette growth and therefore becoming a costly exercise in the art of pleasing no one.