Data gatherer Nielsen, which tracks retail sales but not online or at specialty “vape shops”, says that for the 52 weeks ended August 23 e-cigarette and tank revenue in the US grew 19 percent. But that was down from 125.5 percent growth for the same period ending in 2013, 133 percent in 2012 and almost 1,103 percent for 2011.
Some predict regulation may slow that down further due to fears vaping may become a gateway to smoking for kids, with e-liquids in thousands of flavors with names ranging from the quaint Apple Pie to the outlandish Zombie Juice.
A recent drop in the value of a group of e-cigarettes companies trading mostly over-the-counter on the Pink Sheets in the U.S. highlights the growing caution.
Nine companies had a combined market capitalization of $743.3 million at the close of trading on Wednesday, down nearly 60 percent from a March peak of $1.84 billion, though still up on a year ago.
Electronic Cigarettes International Group, by far the largest, saw its shares close at just $5.50 on Wednesday, down from the high teens in March.
It went public in a reverse merger last year, and has since done a string of deals as small players seek consolidation in a market still home to hundreds of brands.
“The key driver is that by doing this, they’re better able to compete with the tobacco companies,” said Mark Winkler of Fleming Family & Partners, who advised British e-cigarette maker Skycig on its sale to Lorillard in October for 30 million pounds ($49.58 million) plus future payments.
In May, Michigan-based ECIG filed for a follow-on public offering to raise up to $149.5 million and in July announced a $20 million investment from an arm of Egypt’s Mansour Group.
Shares in the second-biggest traded firm, 22nd Century Group, have more than halved since its March high of $6.34, even though its shareholders at the time of filings this summer included funds managed by the likes of Vanguard, Fidelity and TIAA-CREF.
BIG TOBACCO VS PHARMACEUTICALS?
The major tobacco companies do not face the same pressure, since their investments in the sector are tiny compared with the size of their traditional businesses and serve as a hedge against declining tobacco sales.
British American, the world’s No. 2 tobacco firm, set up a unit in 2011 to develop smokeless alternatives and bought UK based CN Creative the following year. It sells an e-cigarette called Vype in Britain, while Reynolds American, in which it holds a large stake, is rolling out an e-cigarette called Vuse across America.
U.S. Marlboro maker Altria Group bought Miami-based Green Smoke for $110 million in April, and in July Lorillard agreed to sell Skycig and Blu, which it bought for $135 million in 2012, to Gauloises maker Imperial Tobacco.
Before exploding in the last four years, e-cigarettes were simple devices largely sold on the Internet, so even though there was venture capital and private equity interest, capital needs were relatively modest.
Now that they grace shelves all along the high street, many companies must invest in slotting fees, quality control, supply chain and marketing to drive and keep market share. That crimps cash flow, making them less attractive to private equity firms who need near-term profits to service their debt, said Winkler. [eap_ad_1] And while some independent companies may still be able to sell out to a bigger company or go public, he said there is concern that many others may get trampled, leaving investors with no exit strategy.
“There will be some independents who will be very successful, but I anticipate that many may struggle to achieve an exit at the end of the day,” Winkler said.
The healthcare industry may be some help.
NJOY, which has had several fund injections from private equity and venture capital funds and others including Silicon Valley heavyweight Sean Parker, has attracted interest from both major tobacco and pharmaceutical firms, according to two sources familiar with the matter. It was not clear which companies, or whether any talks took place.
Buying e-cigarette makers may eventually make sense for healthcare companies since they threaten the nicotine replacement therapies offered by the likes of Pfizer and GlaxoSmithKline.
BAT’s Nicoventures unit, in conjunction with Consort Medical and Kind Consumer, has had a new nicotine inhaler called Voke licensed in the UK as a medical product, the companies said on Friday.