E-cigarette regulation could set back small businesses

To this point, the industry has been more or less the Wild West, with production and sales totally unregulated

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The surging popularity of electronic cigarettes is spurring growth at two Milwaukee-area companies that have emerged as important producers of the key ingredient, and is creating opportunity elsewhere for storefront entrepreneurs.

"This is one of those few times where you see a brand new industry, and it's amazing," said Christian Berkey, founder and majority owner of Hartland's Johnson Creek Enterprises LLC, which describes itself as the country's largest manufacturer of the flavored, nicotine-laced liquids that are at the heart of electronic cigarettes.

But it's also an industry that soon could change dramatically.

To this point, it's been more or less the Wild West, with production and sales totally unregulated. Now, though, the U.S. Food and Drug Administration is poised to step in with as-yet undisclosed rules under its authority to oversee tobacco-derived products.

That could shake up the business models of the Internet-based vendors and tiny, home-based juice-makers that have sprung up over the last few years.

It could even lead to an effective ban on e-cigarettes -- something industry observers discount as a realistic possibility.

But regulations also could solidify the positions of firms, such as Johnson Creek Enterprises and Wauwatosa's Securience LLC, that already have made the move from basement to production lab.

"Regulations will, in general, be good for our particular business," said Don Muehlbauer, owner of Securience, which says it, too, is among the nation's biggest manufacturers of e-cigarette liquids. "They will drive out the little players."

E-cigarettes are battery-powered devices with a heating coil that turns a nicotine-containing liquid -- the stuff Johnson Creek and Securience make -- into a vapor the user inhales.

"Vaping" generally is cheaper than smoking and, advocates say, safer because it doesn't produce the tars and many of the harmful substances found in cigarettes.

Critics, however, say the vapors contain dangerous chemicals, and that research on e-cigarettes is needed. The U.S. Centers for Disease Control and Prevention earlier this year said that while the products "appear to have far fewer of the toxins found in smoke compared to traditional cigarettes, the impact of e-cigarettes on long-term health must be studied."

Earlier this year, CitiGroup labeled e-cigarettes one of 10 disruptive technologies and ideas capable of creating new markets. Wells Fargo Securities analyst Bonnie Herzog, meanwhile, labels e-cigarettes "a game changer."

Ms. Herzog estimates 2013 retail sales of e-cigarettes at $1.8 billion. That's a small fraction of the $81 billion for conventional cigarettes, but the e-cigarette sales have tripled in just two years.

"The potential's huge," said Dan Bartholow, general manager at Securience, which employs not quite 50 people. The firm doesn't disclose annual sales.

Johnson Creek does: $1.2 million in 2009, $7.6 million in 2012, and, Mr. Berkey said, more than $16 million this year.

"Things have taken off in a way none of us ever imagined it would," he said.



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