E-Cigarettes Fire Up Investors, Regulators

A group including Silicon Valley entrepreneur Sean Parker is investing $75 million in a leading maker of electronic cigarettes, part of a wave of money firing up a market that is under increasing regulatory scrutiny. The market for e-cigarettes—battery-powered devices that turn heated, nicotine-laced liquid into vapor—is small but growing rapidly, in part because they are increasingly seen as less harmful than conventional cigarettes. Mr. Parker, who co-founded the music-sharing site Napster and was the first president of Facebook Inc., is part of an investment group acquiring a minority stake in Scottsdale, Ariz.-based NJOY Inc., one of dozens of e-cigarette companies that have surfaced since 2006. "There's a huge opportunity to transition the entire world away from dangerous, carcinogenic, combating cigarettes," said Mr. Parker, who has been a big donor to cancer research, in an interview. E-cigarettes, unlike traditional smokes, currently aren't federally regulated. The Food and Drug Administration warned consumers in 2009 the new technology could pose its own health risks and required further study. The agency has said it is planning regulations that would treat them as tobacco products, but has provided no details. In an interview last week, FDA tobacco czar Mitch Zeller described the e-cigarette market as "the wild, wild West" in terms of regulation. More than a dozen states, including Arkansas, Colorado and Maryland, have banned e-cigarette sales to minors. New Jersey, North Dakota and Utah have outlawed their use in enclosed public spaces. A bill approved by California's state senate in May would bring e-cigarettes under smoke-free laws covering public buildings, workplaces and restaurants. Boston, Seattle and Indianapolis have extended their smoking bans to the devices. Airlines don't allow e-cigarettes, nor do Amtrak or Starbucks Corp. SBUX +0.56% For current smokers, e-cigarettes are believed to be less harmful than traditional smokes, which release most of their toxins through combustion. But some studies indicate nicotine, the addictive agent in cigarettes and in the new devices, may harm fetuses. The long-term impact of inhaling e-cigarette vapor, which contains other substances such as propylene glycol, has yet to be determined. Among the questions faced by federal regulators: Could e-cigarettes, which currently offer flavors such as chocolate, strawberry and piña colada, serve as a gateway to traditional cigarettes for young people? Will longtime smokers use them only to get a nicotine fix where regular smoking is banned? What kind of age restrictions and warnings should they carry? And what about advertising? The FDA's Mr. Zeller declined to comment on what future regulations might look like or when they will be proposed. E-cigarette sellers aren't currently allowed to make health or smoking cessation claims. The European Union also is considering limits on e-cigarette sales, and France's health minister said last month the government would impose the same curbs on them as on conventional cigarettes. E-cigarettes are already restricted in Mexico, Brazil and several Asian countries. The potential market for e-cigarettes is huge. Despite new regulation of cigarettes and stepped-up public health campaigns urging Americans to quit, nearly one in five American adults still smoke. E-cigarettes more closely mimic smoking than do other smokeless products such as moist snuff or nicotine patches. Industry experts say U.S. retail sales of e-cigarettes could reach $1 billion this year, just 1% of the country's cigarette market but twice that of 2012, as they spread from the Internet to store shelves and generate buzz through television advertisements and celebrity endorsements. Sales of traditional cigarettes have been falling as public-health officials mount graphic advertising campaigns and push to expand bans on smoking in public places, and as federal and state tax increases have raised cigarette prices. NJOY, the company in which Mr. Parker is investing, is a top-selling brand. Although industrywide sales numbers are scarce, NJOY captured 35.6% of the $36.4 million in U.S. convenience-store sales in the four weeks ended May 11, according to Wells Fargo Securities, citing Nielsen scanner data. Lorillard's blu had a 33.9% share, followed by the privately held LOGIC and 21st Century brands, with 13.8% and 7.4%, respectively. Mr. Parker is investing nearly $10 million. Homewood Capital, a New York investment fund headed by Douglas Teitelbaum, is investing nearly $40 million. Boston-based Fidelity Investments is contributing about $25 million. And Founders Fund, a San Francisco venture-capital fund started by PayPal co-founder Peter Thiel, is kicking in roughly $5 million. Mr. Thiel helped finance the 2005 film "Thank You for Smoking," a satire about the cigarette industry. Mr. Teitelbaum, former head of hedge fund Bay Harbour Management, says he began exploring an investment in e-cigarettes after deciding the category could be a game-changer and that NJOY's product was impressive. "It's clear they have the flavor right, the look and feel of the cigarette right, the branding and packaging right," said Mr. Teitelbaum, who says he smoked traditional cigarettes for more than 30 years before switching to NJOY Kings a few months ago. Unlike many rival e-cigarettes that are made of metal and weigh and look more like fountain pens, NJOY Kings more closely resemble regular cigarettes. The disposable cigarette retails for $7.99 and promises to last roughly as long as two packs of traditional cigarettes. The company has been advertising on TV and has attracted celebrity endorsers such as musicians Courtney Love and Bruno Mars. In March, former U.S. Surgeon General Richard Carmona joined NJOY's board. As the government's top physician, Mr. Carmona had highlighted the dangers of secondhand smoke and supported an outright ban of tobacco products. After joining NJOY, Mr. Carmona said it is important to explore alternatives to traditional cigarettes because the adult smoking rate has remained stuck at around 20%. More study is needed on the health effect of e-cigarettes, he said, but "initial information certainly suggests there is significant potential for harm reduction." He added that e-cigarettes could be another tool to get more people to quit.