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 What the RAI-BAT tech deal means for your business

By Givi Topchishvili

December began with an announcement that Reynolds American Inc. (RAI) and British American Tobacco (BAT) have formalized a framework to collaborate on R&D activities and regulatory, scientific and manufacturing issues relating to vapor products.

This is great news for both RAI and BAT, but it will also have an immediate ripple effect on the vapor industry as a whole. As the cost of participating in the market grows, smaller e-cigarette and vapor companies must figure out how to adapt in order to survive.

While these changes might be new to vapor entrepreneurs, the type of power consolidation evident in the RAI/BAT deal is part of the natural evolutionary process inherent to any emerging industry. I give a detailed analysis of market evolutions in my book, Marketing in the New Millennium, but in a nutshell the standard trajectory looks like this: An innovative product is initially offered by a large number of small companies until it becomes clear that it has significant long-term potential. As the marketing focus shifts from early adopters to broader mass-market appeal, competitors tend to deplete their differentiation, and technologies rapidly commoditize. At that point large corporations move in to buy up and push out most of the competition. It’s a David and Goliath story, where trying to compete dollar-for-dollar in R&D and marketing capacity against the big companies is suicidal. I would advise against counting on heavenly intervention as part of your business strategy.

What smaller companies must understand is that a single vapor industry no longer exists. Instead, there are now two parallel business realities: the mainstream market, controlled by a handful of major players, and the world of niche markets, where smaller companies might still be able to carve out a sustainable presence and avoid direct competition with Big Tobacco until the size of their business or uniqueness of their product draws interest from the large corporations’ M&A departments.

We have seen this scenario play out every time a revolutionary solution arrives. In the early 2000s, Voice over Internet Protocol (VoIP) technology was used by entrepreneurs as a means to wrestle control of 150 million local telephone customers from the world’s four largest telecom companies. Early adopters were lured by cheap pricing and bonus features. Very soon the market became oversaturated with a plethora of small and medium companies offering nearly identical products. That’s when the major telephone providers moved in to protect their territory, leading to rapid market consolidation.

There were smaller companies like MCC that survived to this day by focusing their marketing efforts on small ethnic groups. Their entire strategy (including long-distance pricing and customer support) is based on the individual needs of each one of these ethnicities. But this way MCC avoids direct competition with large telecoms maintaining a robust business model.

There was also Gizmo5, which tailored its products to a very specific technical need within the VoIP industry and sold itself to Google when the latter began exploring entry into telecom. Some of the Gizmo5 proprietary technology was used in the creation of Google Voice—a fine exit strategy for a business at a crossroads.

And then there were companies like Primus that chose to ignore the trends and believed that they could compete in the new mainstream. They chose to have the dollar-for-dollar war with large telecoms, and despite having excellent prospects in the early days of VoIP, raising funds and receiving Wall Street backing, the company was forced to file for Chapter 11 in 2009.

The same paradigm applies to small and medium-sized vapor companies today. They have three options:

• Strategically focus on a specific niche within the industry
• Discover the fastest way to become an M&A target
• Die

To remain relevant, companies must step away from mass-market products and refocus on a niche. These niches could be built around geographic, demographic, aesthetic or technical industry voids. But brand differentiation must be tangible. Laying claim to a clearly defined niche market will allow smaller companies to stay out of the interest spheres of larger corporations and focus on growing the business rather than waging an unequal war.

This approach also opens the door to making your company an attractive acquisition target, once you have a clearly defined advantage—be it a patent, distribution channel or a niche market—and are lucky enough to capture a meaningful share of a market.

Ultimately, this is the surest way to not only survive the forceful entry of Big Tobacco into the vape industry but to turn these very changes into golden opportunities for greater focus, clarity and profit.

Givi Topchishvili is a co-founder of Calumet Advisors, an international strategic consulting company dedicated to the e-cigarette segment.

For Vapor Corp., distribution is key in an ever more competitive market.

By Stefanie Rossel

It’s a success story that we have almost gotten used to: The vapor industry continues to show growth rates that other sectors can only dream of. In the United States, value sales of e-cigarettes have been doubling each year, from $20 million in 2008 to around $1.5 billion in 2014, according to Forbes, and they are anticipated to continue increasing at an annual rate of 20 percent in the future. Bonnie Herzog, managing director of beverages, tobacco and convenience store research at Wells Fargo Securities, expects the U.S. market for vaping devices to grow to $3.5 billion by the end of this year, up from $2.5 billion in 2014. She also forecasts that, by 2018, e-cigarette sales will hit $10 billion.

A poll carried out by Reuters/Ipsos in May and June 2015 found that about 10 percent of U.S. adults currently vape, which is almost four times the share estimated by the U.S. government in 2013 (2.6 percent). According to the poll, nearly 70 percent of new vapers started in the past year alone. By comparison, smoking prevalence among U.S. adults currently stands around 19 percent, according to Reuters. Sales of traditional cigarettes in the U.S. have been declining over the past few years, and, as Euromonitor reports, cigarette value sales growth has slowed considerably, with value sales even declining in 2013, for the first time in more than a decade.

Little wonder then that the leading tobacco companies, after some initial hesitation, embraced the vapor sector to help make up for lost profits in their conventional business. From 2012, they began entering into the e-cigarette market. Today, the top four e-cigarette brands are owned by Big Tobacco manufacturers. According to Nielsen data* from May 2015, R.J. Reynolds Vapor Co.’s Vuse leads the U.S. market with a share of 35.7 percent, followed by Imperial Tobacco’s Blu (22.7 percent), Japan Tobacco’s Logic (13.8 percent) and Altria’s MarkTen (6.1 percent).

Of the many independent manufacturers that started the e-cigarette industry, only NJoy approaches the leading brands’ sales levels in U.S. mass-market retail, according to Nielsen. Anticipated federal regulation of the vapor business is expected to make business even more challenging for independent players.

Point of sale in the limelight

In this highly competitive environment, critical mass and clever strategies are keys to long-term success. Florida-based vaporizer and e-cigarette manufacturer Vapor Corp.—in its own words the only “pure-play” company in the vapor industry that is listed on a major stock exchange (NASDAQ]—is in the process of creating a national vapor product brand. To this end, the company has optimized distribution right down to the end consumer.

In July 2015, Vapor Corp. raised $41.4 million and embarked on an aggressive retail expansion strategy. “We presently have 15 company-owned stores and anticipate at least doubling that number before the end of the year,” says Jeff Holman, Vapor Corp.’s CEO. “By the end of 2016 we are looking forward to having 75 to 100 company-owned stores. Vapor Corp. is in the process of converting both its previously branded stores, as well as new store acquisitions, into a nationally branded ‘VaporMax’ trademarked retail program. This will allow us to create a comfortable and familiar vaping experience for both novice and experienced customers, no matter which store they visit across the U.S.”

The number of vape stores in the U.S. has risen to at least 15,000, with some estimates being as high as 35,000 stores, according to Wells Fargo Securities’ Herzog. Holman says that $2 billion of the $3.5 billion market is spent on vaporizers and that $1.2 billion of that $2 billion is spent in vape stores.

At Vapor Corp.’s stores, particular emphasis is put on the customer experience. Holman explains: “Our vape stores are more than just places to purchase products; they’re places for vapers to relax, interact and enjoy a quality vaping experience. We offer free Wi-Fi, sell coffee and other beverages, as well as light snacks in some locations. Eventually, we are looking to be the Starbucks of the vape store industry. We also obtained our first beer and wine license and are now hosting our customers for the watching of sporting events, as well as other social gatherings.”

In its stores, the company offers proprietary e-liquid brands, including its The Vape Store line (more than 200 flavors) and its new premium Naked Fish line. In addition, the stores sell accessories such as batteries, tanks and mods, and rechargeable vaporizer kits, all of which can be used with e-liquid solutions, wax, dry herbs or leaf.

With its comprehensive portfolio, the company seeks to cater to the needs of users in a market characterized by change. In September 2014, MarketWatch.com reported that open-system vaporizers had officially overtaken cigalikes, contributing $1.5 billion—$0.5 billion more than cigalikes—to the overall vapor sector in 2014.

Vapor Corp. is developing new flavor profiles that are distinct to its brands, enabling users to develop preferences for a certain product based on taste and flavor, like smokers do with their favorite brands of combustible cigarettes. To allow users of competing e-cigarette products to try and transition to Vapor Corp.’s cartridges, the company offers a universal-fit mouthpiece that can be used in conjunction with the battery section of most other popular e-cigarette brands.

The company also has a patent pending for a dynamo-powered e-cigarette that can be recharged by shaking the product, thus enabling continued use without having to plug the device into an electrical outlet.  Vapor Corp. also has a patent pending for a biometric fingerprint locking system, which would allow only the adult owner to power up the device. This innovation is meant to prevent children from secretly using their parents’ vaporizers.

Going new ways

Just as important as innovation, however, is building brand awareness and getting the product to the consumer. When entering the vape market and taking their brands national, the traditional tobacco companies could draw not only on their considerable financial resources but also on their long-standing experience in distribution and marketing in a heavily regulated product category. As a result, each of the leading four e-cigarette brands is currently available in around 100,000 retail outlets nationwide.

Vapor Corp.’s approach is different, according Holman. “To begin with, the traditional tobacco companies have not entered into the vape-store segment of the industry, which is where we are targeting our major expansion,” he says. “Ownership of retail stores has never been their model, and in our pursuit to become the biggest player in this segment, we have in a sense decided to take our proverbial ball and ‘go play where the big boys ain’t.’ This essentially gives Vapor Corp. several advantages. As compared to our competition, we have superior buying power that comes not only from our 15 stores but also from our wholesale business, which still services over 30,000 retail locations, as well as our online efforts.”

What’s more, says Holman, following the company’s $41.4 million capital injection, Vapor Corp. likely has the biggest war chest in this industry segment from which to grow its store brand. The firm has also set itself apart by connecting at the local level. “We have begun to create a major presence in Florida and will continue to grow throughout the state and into the rest of the U.S. By establishing relationships with key local constituents, we now have an understanding about how to break into existing vaping communities that already include our key demographics.”

To take distribution of its products even further, Vapor Corp. intends to set up a franchise system. “In the coming weeks Vapor Corp. will announce a plan for a franchise program that will allow us to further expand our national vape store concept under the trademarked name ‘VaporMax’ with the tagline ‘The Original Vape Store,’ capitalizing on our existing 15-store footprint. Our strategy is to attract ambitious franchisees who share our vision and look to join forces with the leading retail vape store concept in the U.S. We will also seek to convert existing, successful vape store retailers by showing them how they can increase their profits by being a Vapor Corp. franchisee.”

As the company expands, it is taking into account the anticipated regulation of the vapor segment by the U.S. Food and Drug Administration (FDA). In the absence of federal regulations, many states have adopted their own e-cigarette regulations. Needless to say, the differences in regulation between jurisdictions make launching a new vapor product challenging.

Holman sees FDA regulation as an opportunity for Vapor Corp., which he says consistently adheres to FDA regulations and requires its business partners to do the same. “When the regulations are enacted, the e-liquid bar will be raised for all retailers in the FDA’s efforts to protect the public good,” says Holman. “Smaller stores that had been mixing their own blends in back rooms with cheaper ingredients will see their margins decline when they have to purchase higher-quality products, and will likely have to close. Before that occurs, we invite mom-and-pop stores across the country to engage with us as part of our national retail expansion strategy in light of the difficulties that they will face under the new FDA regulations.”

*Nielsen data focus primarily on convenience store sales; they do not include vaporizers or open-tank systems, which are typically purchased in vape shops or tobacco outlet stores.

Conflicting vapor studies are making global headlines and confusing consumers.

By Timothy S. Donahue

Statistics can be a tricky business. When three new studies on the vapor industry were released in late August and early September, they sent seemingly conflicting messages about whether e-cigarettes could help people quit smoking or would lead them to tobacco. Then, major media outlets ran separate stories on all the studies, which sent the vapor industry into a deeper state of confusion.

First, researchers from the University of Pittsburgh Center for Research on Media, Technology and Health and the Dartmouth-Hitchcock Norris Cotton Cancer Center published a study in the Journal of the American Medical Association (JAMA) Pediatrics that linked e-cigarette use to higher probabilities of teens turning to tobacco cigarettes. Then, just a few minutes later, Public Health England (PHE) released its report claiming that e-cigarettes were “95 percent” safer than traditional tobacco.

The JAMA study stated that teens who use e-cigarettes are significantly more likely to try combustibles later on, finding that teens who use e-cigarettes are much more likely to start using traditional cigarettes within a year, compared to peers who do not use e-cigarettes. Researchers looked at about 700 people from ages 16 to 26. None had tried cigarette smoking at the study’s start, and 16 had tried e-cigarettes. The study asked participants if they would try a cigarette if a friend offered them one, or whether they thought they would smoke a cigarette within the next year. Those who answered “definitely no” were found to be “non-susceptible” to cigarette smoking.

A year later, 10 percent of the never-triers of e-cigarettes had taken at least one puff on a traditional cigarette. But 38 percent (six of 16) of e-cigarette triers had taken at least one traditional cigarette puff. “What is extremely worrisome is that these findings further indicate that e-cigarette use by our nation’s youth, which is a major concern in itself, may also be a gateway to smoking,” American Heart Association CEO Nancy Brown said in a statement. “This new study truly underscores just how dangerous of a habit e-cigarette use can be, especially if it is leading to teens taking up additional tobacco products.”

Not everyone agreed. In fact, numerous researchers went on the record as saying the JAMA study was meaningless, citing specifically the criteria of calling someone who had taken “just one puff” a smoker. “This study focused on cigarettes and reports no information on prior hookah, cigar, marijuana, alcohol or smokeless tobacco use,” Lynn Kozlowski, a professor of health behavior at The University at Buffalo, wrote in The Conversation, an academic journal. “If even two of the 16 were discounted because of prior use of other products [and two were], these results would likely be statistically insignificant.” It should be mentioned that several researchers disagreed with Kozlowski’s assertions, stating that they “are not actually legitimate.”

Gregory Conley, president of the American Vaping Association, a vapor advocacy group, said it should come as no surprise that teens who are willing to try vaping are also going to likely try a cigarette. “These ‘gateway’ studies aren’t even assessing habitual use of cigarettes; they’re only asking about ever use,” says Conley. “The fact is youth smoking has declined by a record, dramatic 40 percent since experimentation with e-cigarettes began to increase in 2011. The evidence showing e-cigs to be a gateway out of smoking for both teens and adults is far more clear than any assertion that vaping is leading teens to take up cigarettes.”

In contrast to the JAMA study, the PHE report found that regular users of e-cigarettes are almost exclusively adults who are already smokers, that there is no evidence that e-cigarettes are “renormalizing smoking or increasing smoking uptake,” and that they are not acting as a “gateway” for young adults and adolescents. The PHE report nevertheless advised caution and underlined the importance of providing balanced information.

Overseen by Peter Hajek, a professor of clinical psychology at the Wolfson Institute of Preventive Medicine, and Ann McNeill, a professor of psychiatry, psychology and neuroscience at King’s College London, the PHE report stated, “While vaping may not be 100 percent safe, most of the chemicals causing smoking-related disease are absent and the chemicals which are present pose limited danger.”

“It is not known whether current [e-cigarette] products are more or less effective than licensed stop-smoking medications,” the report continues, “but they are much more popular, thereby providing an opportunity to expand the number of smokers stopping successfully.”

Shortly after the PHE study’s release, The Lancet, a weekly peer-reviewed general medical journal, claimed the PHE “95 percent safer” figure came from a 2014 study published in European Addiction Research, an academic journal. The Lancet said that PHE failed to disclose that the previous study used no “hard evidence” to reach its conclusion.

That 2014 study, led by Imperial College London researcher David Nutt, was based on the conclusions of a two-day workshop of “international experts,” during which the members scored a range of nicotine products for harm. They concluded that e-cigarettes had 4 percent of the harm of traditional cigarettes. Nutt and his co-authors conceded in the study that there was a “lack of hard evidence for the harms of most products on most of the criteria” and that “there was no formal criterion for the recruitment of the experts.”

However, the PHE authors responded to The Lancet critique, which was based on the one perceived flaw. The “error” was centered on just one of 185 references PHE used, essentially ignoring the rest of the 111-page document. “The Lancet believes that the message [that] smokers can benefit from switching to vaping is an undesirable one,” the authors wrote in their response. “The estimate that e-cigarette use is around 95 percent less harmful than smoking is based on the facts that, first, cigarette smoke constituents that harm health are either absent in e-cigarette vapor or, if present, are mostly at levels much below 5 percent of smoking doses; and second, the main chemicals present in e-cigarettes only have not been associated with any serious risk. Our review highlighted how smokers are currently misinformed about these relative risks.”

Carl V. Phillips, chief scientific director for the Consumer Advocates for Smoke-Free Alternatives Association (CASAA), a consumer advocacy NGO that supports tobacco harm reduction, agreed with some of The Lancet’s criticisms, adding that the “95 percent” claim came from a made-up number (referring to Nutt’s study) and the study is a “case of working that magic that turns vague junk science claims” into concrete facts. “The ‘95 percent’ claim has led to criticisms and attempts at clarification, every single one of which, as far as I can tell, is wrong,” said Phillips. “Everyone in sight is trafficking in non-science at a minimum, and nonsense quite often.”

Then it happened again. Just a few days after the PHE study, the Center for Environmental Health (CEH), a California, USA-based health advocacy group, reported that 97 e-cigarette products purchased from major retailers and online sellers were shown to produce two potentially cancer-causing chemicals, acetaldehyde and formaldehyde, after testing by an independent laboratory. This was in complete contradiction to PHE’s second “fact” that it had used to base its conclusions.

Vapor industry experts and anti-smoking advocates alike cried foul of the CEH study almost immediately after its release. Not only did the study not list any methods, they argued, but it also didn’t state what products were tested. It did, however, name a few of the companies whose products it had tested. Oddly, the CEH study also included an apparently staged photo of a seemingly pregnant woman vaping, an issue the study didn’t confront.

“[The CEH report] made junk science claims that would tend to scare smokers away from switching to e-cigarettes,” said Phillips. “In particular, their headline claim in their press release was ‘High Levels of Cancer-Causing Chemicals in the Majority of Nearly 100 E-cigarettes Tested.’ How high? They offer absolutely no context for that word in the press release and nothing clear in the report. We know that the real answer is ‘not high enough to worry about.’ The two chemicals they are talking about are formaldehyde and acetaldehyde, which have been measured in pretty much every study of e-cigarette emissions and found not to be present at levels that pose a concern.”

Numerous vapor industry experts complained that all the mentioned studies had serious flaws. According to Francisco Garcia, a researcher at the University of Arizona, the truth is that “there is not enough evidence to evaluate the effectiveness, safety, or benefits and harms of using e-cigarettes to help people quit smoking.” Anecdotally, however, there are possibly millions of stories and blog posts that can be found online of ex-smokers extolling the virtues of vapor. Just the CASAA website has a testimonials section with more than 5,300 stories of smokers using vapor to quit.

Several studies show that vaping more likely helps smokers quit, rather than push people towards traditional tobacco. In fact, a new online poll out of Scotland by psychologist Christopher Russell and colleagues at the Centre for Drug Misuse in Glasgow (an independent research entity), found that of the 7,300 people surveyed who said they had vaped at least once, 5,000 had been regular smokers when they first started vaping. More than 80 percent of smokers had quit completely since beginning to vape regularly, which, at the time of the survey, was an average of 14 months before they took the survey.

More than 56 percent of respondents who were still smoking at the time of the survey had at least halved their daily smoking since beginning to regularly vape (defined as at least every other day). The average reduction was from 23 cigarettes per day pre-vaping to four per day. In full disclosure, The Centre has received research funding from public bodies, such as the UK Government Department of Health and the United Nations, and from tobacco companies, such as British American Tobacco and Philip Morris International.

Conley quit smoking using watermelon-flavored e-liquid in 2010. He says one of the major issues with vapor studies is that the major medical journals that have the best public relations firms generally publish only research by those ideologically opposed to harm reduction for smokers. “Meanwhile, quality studies often get ignored by the media, in part because good news isn’t sexy,” says Conley. “With each passing year the number of negative and slanted studies just keep piling up. This has undoubtedly impacted smokers’ perceptions of the relative risk of vaping versus smoking, which is why one of the major conclusions of the recent Public Health England report was that health authorities need to combat this rampant misinformation.”

The one thing that can be garnered from most vapor industry studies to date is that e-cigarettes are most likely a reduced risk over smoking cigarettes. “E-cigarettes are not completely risk-free, but when compared to smoking, evidence shows they carry just a fraction of the harm,” said professor Kevin Fenton with PHE, who was not involved in this particular PHE study.

Exactly how much risk is reduced remains an open question—but we can expect the researchers to continue confusing us all.

A state-of-the-industry seminar presented by the Vapor Technology Association set a solid foundation for the newly formed advocacy group.

By Timothy S. Donahue

It’s coming. Once deeming regulations for the vapor industry are finalized, the lobbying efforts and court battles will intensify. Training for the big fight could prove to be one of the toughest tests for the fledgling industry as it attempts to take over tobacco. In fact, vapor advocates have already gained valuable experience and momentum in various battles in multiple levels of government across the U.S. It isn’t enough, however. There is still a lot of work ahead.

The vapor industry needs to do a better job of informing legislators and the general public about the public health benefits of vaping. Too much misinformation has been disseminated and propagandized by major media outlets and the anti-vapor faction. This was the main message of the first e-cigarette summit hosted by the newly formed Vapor Technology Association (VTA). Held in Washington, D.C., in early October, the inaugural event brought fresh ideas from voices not typically heard at e-cigarette seminars.

Lobbyists, lawyers and industry leaders all shared their insights into the rapidly evolving vapor market. Fittingly, the focus was on the U.S. Food and Drug Administration’s (FDA) deeming e-cigarette regulations and strategies for state and federal lobbying efforts. Ella Yeargin, ombudsman for the FDA, told the invitation-only crowd that she serves as the focal point for addressing complaints and assisting in resolving disputes between companies or individuals and FDA offices, such as the Center for Tobacco Products. She said her office expects to be quite busy once deeming regulations have been reviewed by the White House.

The ombudsman serves as a neutral and independent resource for members of FDA-regulated industries (such as vapor and tobacco) when they experience issues with the regulatory process. She expressed that her office could be contacted without repercussions from the FDA. “Firstly, I know nothing about when deeming [regulations] are coming,” she said. “Contacts to my office are held in confidence [between the person/company and the ombudsman].” This could prove vital as companies may want to ask questions before having a formal discussion with the regulatory agency.

Drew Perraut, founder of Radiant Strategies—who formerly worked with the Office of Information and Regulatory Affairs (OIRA), a statutory arm of the White House’s Office of Management and Budget that is currently reviewing the FDA’s deeming regulations—said the FDA has a very “particular” perspective concerning the vapor industry. The FDA’s mission is the protection of public health. “The impact on the regulated community is not of great interest to them,” he said.

OIRA has a different role, said Perraut. The White House looks more at the effects on industry, as well as society. “As ‘deeming’ wraps up, OIRA is a place where your interests will really be taken into account. It is your best chance to impact how these policies come about,” he said. “The FDA is going to have to make their case [for the proposed rules] since all the science seems to indicate that the risk profile [for e-cigarettes] is dramatically lower than the FDA wanted to admit in the proposed rule.”

That is a fundamental change. “It is extremely important that people weigh in on the final rule,” Perraut said, adding that deeming regulation has the ability to create change unlike any other proposed rule in tobacco history. “Moving to a product-by-product analysis opens up the final rule to be quite different than the proposed rule.” In reference to flavors, Perraut said there will “be action on flavors before the end of this administration.” That is in stark contrast to the view of industry experts who have said that the FDA will not act on flavors until after the presidential election in 2016.

Beyond regulation, speakers also confronted current legislation that could benefit the vapor industry. Ashley Davis, a partner at West Front Strategies, said the industry needs to get behind legislative issues such as the Cole Bill, which would amend the Food, Drug and Cosmetics Act to change the grandfather date for “deemed tobacco products.” This change would allow for all vapor products currently on the market to remain on the market without being subject to the burdensome premarket FDA approval application process.

A provision of the Tobacco Control Act echoed in the FDA’s draft deeming regulations would require any product deemed by the agency to be a tobacco product to go through a lengthy, expensive “premarket tobacco application” process to remain on the market—unless its marketers can prove that it’s “substantially equivalent” (SE) to a similar product already on the market as of Feb. 15, 2007, an essentially random date chosen by those who wrote the law. “The SE requirement could destroy the industry,” said Davis.

Another bill, sponsored by U.S. Rep. Robert Aderholt of Alabama, would prevent the FDA from requiring premarket reviews of e-cigarettes that already are on the market. The provision is a technical change that would keep the deemed products under FDA oversight but allow them to be regulated in the same way as currently regulated tobacco products. “We are supporting these bills because they are the best options we have available right now,” said Davis.

Beyond the regulatory debate, there are things the industry could be doing now in preparation for the final rule, according to William McGrath, a partner at Potomac Law Group. “This is the kind of stuff we can pretty much guarantee will be in the final rule,” he said. “Child-resistant caps, for example, will be a final rule.” McGrath said a successful future for a vapor business will be based on how well those businesses weather the storm. “You need to be ready for the regulations so you can pick the battles and prepare yourself to do what needs to be done to keep your products on the market.” Other steps manufacturers could make include nicotine warnings on labels and packaging that doesn’t appeal to youth.

Creating industry-wide standards could help motivate regulators to move in a more vapor-friendly direction, according to Arnaud Dumas de Rauly, the secretary-general for European and international relations of FIVAPE, a French vapor trade association. He told attendees that because France had little to no vapor manufacturing standards, the French vapor industry decided to create its own standards.

“We were then able to use those standards and use them to lobby regulators so they could make decisions based on these standards,” he said. The industry basically incorporated the basic [Tobacco Products Directive] principles for Europe into vapor industry standards, according to de Rauly. “I got an e-mail today from the European Commission that states they will base all of the implementation acts on the works being done at the European standards body.” This is something the American vapor industry should try to mimic, said de Rauly. “It has really helped us over the past two years. We are using standards to get regulators to do what we want them to do.”

Welcome to the industry

The VTA is the latest addition to the long list of industry associations. Ron Tully, a partner at Next Generation Labs and a co-founder of the VTA, said the organization was created because there are different needs in terms of commercial interests concerning vapor regulation and legislation that other associations are not currently addressing. “What we are finding is there isn’t a sufficiently broad-based trade association that is actively engaged in areas such as positive and active engagement with the FDA and state-level regulators,” Tully said. “Having a trade association that is positive and proactive can make an important impact in filling voids where there is currently no guidance in the vapor industry.”

During an exclusive interview with Vapor Voice before the seminar, Tony Abboud, national legislative director for the VTA, said the organization will be run by a professional public policy and communications team “never before seen” in the industry. This would include federal lobbyists, state lobbyists, and lawyers and public affairs professionals with industry experience. “Our mission is keeping vaping markets competitive for both large and small players,” said Abboud. “We want to ensure the long-term viability of the industry, defeat bills that stifle innovation critical to public health and transform the public debate on vapor products.”

The organization has a three-pronged approach to accomplish its goals, according to Abboud. He said that the VTA must not only confront attacks on at the state and federal legislative levels but also keep an eye on how the media reports on the vapor industry.

“The anti-vaping regulatory and media campaigns are being conducted by an entrenched, highly coordinated and well-funded public-health lobby, aided by Big Pharma corporate interests,” said Abboud. “These groups, along with the Centers for Disease Control [and Prevention] and state departments of public health, are unethically peddling fear and false information by making statements that are contradicted by science and are inconsistent with the FDA’s own position on nicotine-containing products.”

The VTA messaging will be based on the significant body of scientific data supporting the positive health implications of vapor products on adult consumers, according to Abboud. “The VTA will not only respond to negative press, but we also will develop a proactive engagement strategy promoting the obvious and established life-saving potential of the vapor industry with national and local media outlets,” he said. “We will not stand idly by while lawmakers and regulators try to destroy our industry based on emotion, but will coalesce the forces to advocate for rational regulation based on science.”

The FDA’s treatment of tobacco provides clues about what the vapor industry can expect, post-regulation.

By Patricia Kovacevic

These past couple of months the Food and Drug Administration (FDA) Center for Tobacco Products, which is the primary regulator of tobacco products in the United States, has been perhaps more active than ever in enforcement against tobacco products manufacturers, as well as with respect to rulemaking and issuance of guidance documents.

Why should we in the vapor industry care? In the immediate future the FDA will assert its authority over vapor products (and, possibly, vapor devices) containing tobacco-derived nicotine. Vapor products will be covered by the same regulatory regime as cigarettes, barring a successful challenge to some or all of the FDA’s authority to regulate such products. Thus, the FDA’s current behavior and thinking vis-a-vis conventional, regulated tobacco products (such as cigarettes) will be consistent with the FDA’s future actions on vapor products, once these are deemed tobacco products. While we may disagree vigorously that e-cigarettes or e-liquids are tobacco products—they are, after all, anti-tobacco products by definition—the FDA has no choice but to act within the legal framework Congress provided through the 2009 Family Smoking Prevention and Tobacco Control Act (TCA) amendment to the Federal Food, Drug and Cosmetic Act.

What are some of the recent the FDA developments that should concern vapor products manufacturers and importers in the United States?

On July 1, 2015, the FDA issued an advance notice of proposed rulemaking (ANPRM) and opened the docket for public comment to obtain information related to the regulation of new “tobacco products” subject to the TCA and restrictions regarding the sale and distribution of such tobacco products. Specifically, this ANPRM is seeking comments, data, research results or other information that may inform regulatory actions the FDA might take with respect to nicotine exposure warnings and child-resistant packaging for liquid nicotine and nicotine-containing e-liquid(s) that are made or derived from tobacco and intended for human consumption, and potentially for other tobacco products including, but not limited to, novel tobacco products such as dissolvables, lotions, gels and drinks. This FDA ANPRM comes before the FDA has had the opportunity to finalize regulation, which will bring (“deem”) additional products, including vapor products, under the TCA and thus subject to the FDA’s regulatory authority.

An ANPRM is an early rulemaking stage, but it’s important in collecting scientific and other types of information the FDA will use in issuing its proposed or even, directly, its final rule on nicotine exposure warnings and child-resistant packaging. There the FDA lags behind other foreign and even domestic (state level) U.S. legislation, at least with respect to child-resistant packaging, which is certainly an important feature of a product.

The FDA cannot require nicotine warnings or child-resistant packaging on vapor products before such products are brought under the FDA’s regulatory authority through the deeming rule. Also, the FDA will likely exercise caution in issuing a specific nicotine warning requirement because the FDA’s nicotine warnings, like any warnings, must be science-based and must withstand a possible First Amendment challenge. As you may know, to date the FDA’s attempt to impose certain graphic health warnings to cigarette products was challenged successfully on First Amendment freedom of speech grounds, on an “as applied” basis. Both the United States District Court for the District of Columbia, in R.J. Reynolds Tobacco Co. v. Food and Drug Administration (845 F. Supp. 2d 266 (D.D.C. 2012)), as well as the United States Court of Appeals for the District of Columbia Circuit, in R.J. Reynolds Tobacco Co. v. Food and Drug Administration (696 F.3d 1205 (D.C. Cir. 2012)) determined that the actual graphic health warning images chosen by the FDA violated the First Amendment.

Later this summer, on Aug. 27, the FDA issued warning letters to three cigarette manufacturers that describe their cigarettes on product labeling as “additive-free” and/or “natural.” The FDA found that this labeling represents explicitly and/or implicitly that the products or their smoke do not contain or are free of a substance and/or that the products present a lower risk of tobacco-related disease or are less harmful than one or more other commercially marketed tobaccos. Thus, the warning letters are for violations of Section 911 of the TCA, a section that addresses modified-risk tobacco products (MRTPs). The FDA has determined that these products, described as “natural” and “additive-free” on their labeling, need an MRTP order from the agency before they can be legally introduced as such into interstate commerce. MRTPs can only be introduced into interstate commerce after scientific evidence to support them has been submitted to the FDA and the FDA has issued an order permitting their marketing. To date, the FDA has not issued any orders that would permit label claims of reduced risk or harm to users and nonusers. The costs to submit an MRTP application are likely—and easily—in the millions of dollars per product, because the FDA MRTP guidance suggests extensive studies are needed, and are therefore prohibitively expensive for the vast majority of the vapor industry, and with unknown commercial benefits.

Let’s think for a second what would the FDA do if a vapor product, once regulated as tobacco product, made a claim such as “tobacco smoke free” or “no tobacco-specific nitrosamines” or, better yet, “no carbon monoxide” (all of which are harmful features of conventional cigarettes or their emissions). Even if such a claim were absolutely true—after all, e-cigarettes do not emit tobacco smoke or carbon monoxide—the FDA, according to its strict views, could still issue a similar warning letter to the respective e-cigarette manufacturer based on the fact that the product labeling represents that the product or its smoke “does not contain or is free of a substance“ (such as, for instance, carbon monoxide). The list of comparative claims that would thus be barred could be vast. While consumers would rightfully benefit from accurate information, the TCA’s Section 911 appears to prevent manufacturers from incorporating factually accurate information about their products in labeling or advertising. One can see a potential First Amendment issue here as well—to date unchallenged, but to be watched.

Substantial equivalence

Another interesting development is the issuance this past September of a final guidance (second edition) titled “Demonstrating the substantial equivalence of a new tobacco product: Responses to frequently asked questions” (which I will refer to as the SE FAQ Guidance). This is the third iteration of a 2011 draft guidance that was updated in March 2015 and subsequently challenged in court by several tobacco product manufacturers. The FDA suspended the application of its March 2015 version of the guidance, and the respective lawsuit was withdrawn without prejudice, meaning it could be refiled at any time. There was hope that the FDA would issue a revised guidance actually based on the statutory language, which requires manufacturers to file substantial equivalence reports with the FDA for changes in the product, not product packaging or product count. That did not happen, and the FDA’s SE FAQ Guidance reinforces the FDA‘s own interpretation of a “change” to a product to mean also a change in the product packaging, which, again, does not appear supported by the language in the TCA.

This guidance describes the FDA’s current thinking on whether and when a change to a tobacco product’s label, product quantity in the package, additives or specifications renders that later product a “new tobacco product” subject to premarket review (whether or not the new tobacco product replaces the original tobacco product). It explains that a manufacturer may submit streamlined SE reports for certain modifications to labels and changes to product quantity. The guidance also explains the FDA’s plans and processes for review of the streamlined SE reports. Finally, this guidance responds to several questions that have been raised about the SE process more generally.

While in the FDA’s own words, guidances describe the FDA’s current thinking on a topic and should be viewed only as recommendations, unless specific regulatory or statutory requirements are cited, the FDA acts and enforces the law according to its guidance documents. Why should vapor product manufacturers care? Well, if the FDA’s upcoming deeming rule remains unchallenged, or survives potential legal challenges, all guidance documents published to date by the FDA regarding tobacco products will be applicable to vapor products, including this one.

There are many issues with this SE FAQ Guidance. I will only focus on the most glaring issue, the very definition of tobacco product. First and foremost, in the SE FAQ Guidance Section B, the FDA concludes, correctly, that a label (i.e., packaging, but could also be an insert or certain other types of communications about the product) is “not a part of a tobacco product.” Yet substantial equivalence reporting requirements are currently applicable to tobacco products only, as provided in the TCA and as currently enforced by the FDA. (Ingredients of tobacco products could be required to undergo premarket review, but at present the FDA does not intend to enforce this requirement.) The FDA then proceeds to justify why label changes still require a substantial equivalence report, in spite of a label not being a part of a tobacco product as per the statutory definition, and as agreed by the FDA itself. One would inevitably ask, where is the logic, and is the FDA making new laws and circumventing the legislator? Why do we need an SE FAQ Guidance for something (such as product labels) that is not supposed to undergo the substantial equivalence reporting and review process?

This matter is certainly of interest to vaping products manufacturers. According to this SE FAQ Guidance, at a date as of yet unknown in the near future all vapor products and their packaging would remain virtually “frozen in time,” and no change, line extension or rebranding would be possible without filing a substantial equivalence report with the FDA, at a non-negligible cost and effort. And, given the FDA’s track record of protracted yet diligent review (think years!) and challenges to the content of substantial equivalence reports, there is little hope that changes to products, even cosmetic changes to packaging, would be permitted by the FDA without extensive and costly filings, or at least that the respective “streamlined” substantial equivalence reports would be reviewed in a time that is realistic from a commercial/competition point of view to enable progress and innovation in the industry.

On Sept. 30, Imperial Tobacco Group, Reynolds American and Altria filed a new lawsuit against the FDA in the U.S. District Court for the District of Columbia, stating that the updated SE FAQ Guidance violates their commercial speech rights under the First Amendment and exposes manufacturers to civil or criminal penalties. Although the guidance is described by the FDA as nonbinding, it creates legal obligations. The FDA appears to have failed to follow the necessary rulemaking procedures required for substantive measures. Plaintiffs are seeking an order to enjoin the FDA from enforcing the SE FAQ Guidance, declare the SE FAQ Guidance unlawful and vacate it.

I strongly urge you to read this and other FDA guidance documents. The SE FAQ Guidance can be found at http://www.fda.gov/downloads/TobaccoProducts/Labeling/RulesRegulationsGuidance/UCM436468.pdf

The docket for this guidance is open for comments indefinitely. The FDA must read and consider your comments and will appreciate science-based, well-reasoned submissions. In the words of Mitch Zeller, the director of the Center for Tobacco Products, referring to the industry’s ability to educate the FDA through written, formal docket comments, “This is not a spectator sport,” so stay engaged!

Patricia Kovacevic is general counsel and chief compliance officer for Nicopure Labs, a leading U.S. e-liquid and vaping device manufacturer.