Profit from smoking – without buying a tobacco stock

Tobacco companies have long proved to be good investments.

There's a clear reason for that. They sell a product that, while lethal, is also highly addictive. This in turn, has given rise to a whole industry of products and therapies to help people give up.

The trouble is, as anyone who's ever tried it knows, giving up smoking is very hard. No single product from patches to drugs to hypnotherapy works for everyone, and some people find it virtually impossible to quit.

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So any company that found a highly effective way to help smokers kick the habit would be on to a major winner.

Which is why investors are getting very excited about the growing popularity of the e-cigarette'

The quest for a safer' cigarette

From the 1950s onwards, cigarette companies pushed low tar' or filter' cigarettes. The problem was that they didn't actually do any good. Smokers simply took more drags to compensate.

Things weren't helped by the fact that companies didn't really want to admit that normal cigarettes were harmful. After a few high-profile flops, the tobacco companies' quest for a safe' cigarette was all but abandoned.

Then, in 2000, a Chinese pharmacist came up with the concept for the electronic cigarette, or e-cigarette'. His idea was to build a device that looked like the real thing, and even delivered puffs of smoke' (in reality, water vapour). The trick was that while it still contained nicotine the addictive bit of the cigarette - it didn't contain any tobacco, which causes most (though not all) of the health problems.

The basic idea was quickly imitated, with various companies coming up with their own, slightly different, delivery systems. Industry figures suggest that around 3.5 million e-cigarette devices were sold worldwide last year. And the US Centers for Disease Control and Prevention believes that up to 20% of the country's smokers are thinking about switching to them.

Now, e-cigarettes are a far from perfect solution for smokers. While most people agree that they are better than ordinary cigarettes, there are still health concerns. Even on its own, nicotine has been linked with cancer and of course, by continuing to inhale it, you continue to feed the addiction.

Then there's the problem of quality control, with reports of people getting gum infections from dodgy versions sold over the internet. And there are also concerns that because e-cigarettes currently circumvent smoking bans, non-smokers particularly schoolchildren might be tempted to take up using them.

However, while even the e-cigarette industry recognises that there's a need for some sort of regulation, an outright ban looks unlikely.

On the health promotion side of things, everyone accepts that since ordinary cigarettes look set to stick around, it makes no sense to ban something that could save smokers' lives. As for Big Tobacco which had previously lobbied hard against e-cigarettes it now seems to be accepting the inevitable. The big players now plan to enter the e-cigarette market.

So overall, the evidence points to them being sold, but with a lot more regulation. The UK government has said that from 2017 onwards they will be treated as medical devices. At the same time EU ministers recently agreed in principle a similar deal though it will take months to finalise.

The good news for the industry is this means that its future seems secure. It should also clear out the dodgier players in the business. But it also means that they will have to invest in proper research, to prove that their devices do prevent people from smoking. This won't come cheap.

How to profit from the rise of the e-cigarette

Consort Medical

LSE: CRST

Two years ago, Consort took a gamble that there would be demand for a high-quality e-cigarette. It started work on developing one, called Oxette. This gamble now seems to have paid off. The e-cigarette subsidiary of British American Tobacco (BAT) has decided to license Oxette, rather than develop one in-house.

This is a win-win for both firms. BAT will save time, gaining a march on its rivals, who will have to modify their research in light of the new regulations. Consort will gain from having BAT throw its distribution and marketing weight behind Oxette, which is due to launch in 2014. Given that the tobacco giant has sales of £15bn a year, it's clear that the potential payoff could be huge.

Obviously, the big risk is that the project doesn't pay off. However, while this clearly would be a blow, Consort isn't a one-product' company it isn't solely dependent on the e-cigarette by any means. It currently trades on ten times earnings, and has low levels of debt.

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