Even as electronic cigarettes draw the scrutiny of regulators around the world, investors are seeing potential in the fledgling industry.
This week, electronic cigarette maker NJOY received a $70 million capital injection from a group of investors, including Brookside Capital and Morgan Stanley Investment Management, in the latest vote of confidence for a fast-growing industry.
The company, based in Scottsdale, Ariz., boasts several entrepreneurial investors including Sean Parker, co-founder of the now-defunct Napster, and Peter Thiel, the founder of PayPal.
The private round of funding values the company at around $1 billion, according to a person briefed on the financials, and comes as regulators in Europe and the United States are looking to legally define parameters for the industry. The European Parliament this week approved regulations in the European Union for the industry that could be copied in other countries.
Electronic cigarettes, or e-cigarettes, are being marketed as a better alternative to real cigarettes. They simulate tobacco cigarettes but operate as battery-powered devices that deliver nicotine or flavoring through a liquid solution. Atomizers create the
same sensation a smoker gets from blowing smoke.
But the industry has come under scrutiny from some health officials who say the safety of e-cigarette products has not yet been proven. Others raise concerns that a boom of e-cigarette products will revitalize the appeal of cigarettes.
NJOY, whose e-cigarette products are sold in more than 90,000 stores in the United States and more than 40,000 outlets across Europe, has marketed itself as a technology company that is trying to defeat a health epidemic rather than prolong its demise.
"We believe that only an independent company can have as its corporate mission the extraordinary technological and important objective to make cigarettes obsolete," said Craig Weiss, chief executive of NJOY. Weiss, who is a patent lawyer and former hedge fund manager, compared the initiative and its ambition to putting a man on the moon.
His brother Mark, also a lawyer, founded NJOY in 2006 after a trip to China inspired him to enter the e-cigarette market. During his trip, he visited a trade show where e-cigarettes, so large they looked like cigars, were being showcased.
"It seemed to him that this was the future of smoking," said Weiss, who took over as president of NJOY in 2010.
It is a view not shared by the EU, which ruled this week that advertising for e-cigarettes would be banned in 28 nations. The new rules, which will be enforced in 2016, also set limitations for the amount of nicotine e-cigarettes can contain and will force e-cigarette makers to include health warnings on the product.
In the United States, the Food and Drug Administration has categorized e-cigarettes as "tobacco products" but has not yet determined any rules for them. Pressure has been building from lawmakers to take a harder line and begin immediate regulatory oversight.
For now, sales of e-cigarettes continue to soar. Industry experts estimate that the market is worth nearly $2 billion, although that is just a fraction of the $80 billion-a-year tobacco industry in the United States. Analysts at Wells Fargo recently estimated that e-cigarettes could replace regular cigarettes within the next decade.
But as e-cigarettes become more popular, major tobacco companies are taking note. Lorillard, the maker of cigarette brands like Newport and Kent, acquired Blu eCigs for $135 million in 2012, and RJ Reynolds, Japan Tobacco International and British American Tobacco have also scooped up stakes in emerging e-cigarette companies.
The presence of such big tobacco firms has caused some critics to question whether e-cigarettes are just a new way to get people hooked on nicotine, an addiction that could lead them to turn to tobacco cigarettes.
To counter that impression NJOY points to its unusual team of executives that includes veterans of the old tobacco industry, as well as scientists and doctors to help with this image. It recently added former Surgeon General Dr. Richard H. Carmona to its board.