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Morgan Stanley shares thoughts on e-cigs

| August 16, 2013

In a report summarizing “key thoughts” on e-cigarettes, financial services provider Morgan Stanley acknowledges it has been surprised by the success of e-cigarettes, given the commercial failures of other innovative products such as Accord and Eclipse and the slower-than-envisioned development of tobacco segments such as snus and dissolvables.

E-cigarettes have already achieved volume equivalent to about 1 percent of the U.S. market. Morgan Stanley attributes the sector’s success to effective nicotine delivery, broader consumer acceptance of technology, widespread consumer perception of less health risk versus conventional combustible products, growing societal pressure against cigarette smoking and the current regulatory vacuum, which allows for aggressive marketing.

At the same time, the bank notes that e-cigarettes won’t necessarily benefit established tobacco companies. The potential business risks to the traditional industry include cannibalization of tobacco cigarette sales volumes, FDA regulations preventing the marketing of e-cigarettes under tobacco cigarette name brands and uncertainty about the capacity of e-cigarettes to develop the brand equity and consumer loyalty that is typical for traditional cigarettes.

According to Morgan Stanley, Lorillard is best positioned to take advantage of the new segment because it owns the current e-cig market leader Blu Ecigs, while Reynolds American “probably has the most to gain from cigarette industry discontinuity.” Altria, as the dominant cigarette incumbent, has the most to lose.

Future success for e-cigarettes, according to the investment bank, depends on the scale and pacing of technological and product performance improvements, along with ultimate FDA regulation and federal/state excise tax structure, the analyst said.

 

 

Australia’s plain packaging an “anomaly”

| November 29, 2012

Morgan Stanley analysts believe the spread of plain packaging beyond Australia may be “very slow.”

Capital markets have been concerned that Australia’s plain tobacco packaging law–the world’s first–could spread to other nations, ultimately commoditizing the tobacco category by hurting brand equity and reducing manufacturers’ pricing power.

The analysts base their optimism on the facts that there is no evidence that the measure will reduce tobacco use or youth initiation and that such legislation appears both “extreme and disproportionate.”

They also point out that plain packaging will “almost certainly” fuel the black market, thus reducing tax revenues, and that the legislation arguably violates various international trade rules.

The analysts suggested that the nation’s geographic positioning may have led policy makers to believe that the country would be largely immune to contraband.

Although the Commonwealth still faces strong legal challenges under a Bilateral Investment Treaty with Hong Kong and the World Trade Organization, the failure of the industry’s constitutional challenge in the country’s High Court “reflects the unique nature of Australia’s ‘protection’ of trademarks and intellectual property,” the analysts said.