Children using e-cigarettes like Lorillard's (NYSE:LO) Blu are twice as likely to try traditional cigarettes made by Lorillard, Reynolds (NYSE:RAI), and Altria Group (NYSE:MO) than those who have never tried an e-cigarette.

According to the Centers for Disease Control, 43.9% of non-smoking youth that have tried e-cigarettes report an intention to smoke a conventional cigarette within the coming year, versus just 21.5% of those that have never tried an e-cigarette.

That's worrisome given that reducing spending on healthcare treatment for tobacco users remains a major focus of policymakers and healthcare payers.


Source: Lorillard.

Teen use climbing
The Centers for Disease Control conducts its National Youth Tobacco survey of middle and high school students in a bid to gauge tobacco's appeal to teens and handicap future tobacco use.

According to the CDC study, more than 250,000 children smoked e-cigarettes last year, up from 79,000 in 2011. The increase in e-cigarette vaping and the growing number of teens interested in smoking conventional cigarettes suggests that e-cigarettes, which were initially launched as devices to help curb smoking, may actually lead to more, rather than less, tobacco use.

Rising teen use of e-cigarettes reflects the market's general embrace of vapor nicotine devices. Over the past few years, sales of e-cigarettes have soared from hundreds of millions of dollars to nearly $2 billion, and analysts estimate that sales of e-cigarettes may total $10 billion by 2017. Some analysts even predict that e-cigarette sales could someday outpace those of traditional cigarettes.

On the bandwagon
E-cigarettes growth and the corresponding risk to conventional cigarette revenue has caught the attention of major cigarette companies including Lorillard, Reynolds, and Philip Morris, which are moving quickly to control the market.


Source: Reynolds

Lorillard has been the biggest and most aggressive e-cigarette manufacturer. The company acquired Blu, the nation's top-selling brand, with roughly 40% market share, back in 2009 for $135 million and has rolled the Blu brand out nationally in a bid to garner first-to-market sales benefits. As a result, sales of Blu totaled $37 million in the second quarter.

Reynolds and Philip Morris have been a bit more cautious, but have since embraced their own e-cigarette brands in order to take advantage of rising demand and ostensibly build brand loyalty.

In February, Altria announced a $110 million acquisition of Green Smoke, which will complement its MarkTen brand. And Reynold's is rolling out its own Vuse brand in more markets even as it buys Lorillard in a $27 billion deal that will result in Blu being sold to Imperial Tobacco.

Regulations are coming
Nicotine has long been associated with health risk, including a reduction in brain development and function. Nicotine is highly addictive, and evidence shows that despite intentions to quit, three of every four teen smokers end up becoming adult smokers.

That suggests that government's focus on reducing youth smoking is on target.

In April, the FDA proposed regulations for e-cigarettes, including registration of products and ingredients, halting the distribution of free samples, and minimum age restrictions for sales. While the regulations initially focus on these areas, it's not a stretch to assume that regulations will spread to include advertising and flavors like Java Jolt, too.

The CDC's study found that children that have seen or heard tobacco ads have a higher interest in smoking than those who haven't, and that the more exposed teens are to advertising, the more likely they are to pick up the habit.

Among those exposed to ads, 25.6% of those seeing or hearing at least three to four ads intended to smoke in the coming year, while just 13% of students without exposure reported an interest in smoking.

The cost of care
The Surgeon General's office has been tracking the economic and societal impacts of smoking for 50 years, and efforts to curb tobacco use have been mostly successful.

According to the Surgeon General, smoking kills almost 500,000 Americans every year, and more than 20 million Americans have prematurely died over the past 50 years because of smoking. That number is likely to climb given that more than 16 million Americans are currently living with some form of smoking-related disease.

As a result, treating diseases caused at least in part from smoking costs $132 billion annually; creating a significant headwind for public healthcare programs like Medicare and Medicaid.

Fool-worthy final thoughts
The Surgeon General reports that more than 3,000 American youths smoke their first cigarette every day. That's a troubling statistic given how many young smokers turn into adult smokers.

So far, tobacco companies have had free reign in establishing e-cigarettes in the marketplace, but that freedom appears to be coming to an end. As the industry gets more competitive, consolidation is likely, but that doesn't mean access to e-cigarettes will shrink. If policymakers and healthcare payers hope to prevent e-cigarettes from leading to traditional cigarette smoking, they'll need to increase their scrutiny of the industry in the coming years.
