Fitch: EU E-cigarette plan may boost investment by big tobacco

Oct (KOSDAQ: 039200.KQ - news) 11 (Reuters) - (The following statement was released by the rating agency)

The European Parliament's rejection of a proposal to regulate e-cigarettes as medicine may spur major tobacco companies to accelerate the roll-out or increase investment in their own products, Fitch Ratings says.

The decision means e-cigarettes will remain a fertile area for the small players that started this fledgling market, and the tobacco giants will therefore want to make sure they do not lose out as the market grows.

The mid-term growth of e-cigarettes - which still account for no more than 2% of smoking in the EU - is hard to predict, and will depend significantly on pricing, availability and the consumer experience compared with traditional cigarettes. But we believe growth prospects could be substantial.

Europe's latest tobacco regulations will introduce some curbs, such as restrictions on advertising. The parliament's rejection of the most stringent proposal on treating them as medicine, however, means there should be no impact on their availability, enabling the current pace of substitution with traditional cigarettes and tobacco to continue.

This would have a negative impact on tobacco companies, but there is still room for individual countries to lobby for changes before the rules come into force or to introduce their own local requirements. The UK authorities, for example, have called for e-cigarettes to be regulated as medicine. The Italian authorities have also expressed concerns as to whether easy availability could make e-cigarettes an entry point for smoking among the young, partly offsetting the overall health benefit from helping existing smokers to quit.

The large tobacco companies were initially absent from the e-cigarette industry, but they are now working to catch up with the smaller specialist producers. British American Tobacco (LSE: BATS.L - news) , which recently launched its product in the UK, and Philip Morris International (NYSE: PM - news) have more products in the pipeline.

Further regulation or demand for scientific studies could make it easier for the tobacco companies to bridge the gap - thanks to their deep pockets and experience of dealing with a highly regulated trading environment. Tougher regulation, as well as providing a relative advantage to their e-cigarette divisions, would result in higher prices for e-cigarettes - which could also benefit tobacco companies by limiting their attraction for smokers and slowing the decline in tobacco sales.

In the longer term, the EU or individual governments may also elect to tax e-cigarettes, especially if this leads to a more rapid decline in smoking rates. The total annual EU tax income from tobacco sales is around EUR100bn, which outweighs the additional healthcare costs associated with smoking in the region - and governments would therefore need to find a way to make up for the lost revenue.