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 Juul Labs, in which tobacco giant Altria Group Inc owns a 35% stake,
is facing intense scrutiny in its home market as teen use of
e-cigarettes surges. The company, which faces a U.S. ban on some
products, said on Wednesday that it would suspend all advertising in
the country.
Marlboro makers Philip Morris International Inc and Altria,
announcing the end of their $187 billion merger talks, said they
would instead focus on the joint launch of tobacco-heating product
iQOS in the United States.
Philip Morris walked away from the negotiations with Altria as the
regulatory risk around Juul increased, according to a source
familiar with the discussions. Philip Morris was also concerned
about the performance of its shares, as investors concerned about a
tie-up with Altria expressed their dissatisfaction, the source
added.
Vaping devices such as Juul's, which vaporize liquid containing
nicotine, have borne the brunt of the regulatory crackdown globally.
The iQOS, which heats but does not burn tobacco, is a rival
non-smoking technology and, crucially, has been authorized by the
U.S. Food and Drug Administration (FDA).
When the talks were announced last month, the potential for Juul and
iQOS to dominate the biggest vaping markets globally was seen as
central to the logic of a deal. It would have seen the tobacco
companies reunite a decade after their split and created an industry
heavyweight with a combined market value of $187 billion, triple its
closest rival, British American Tobacco Plc .
However, some investors were skeptical of the synergies the deal
would generate and a steady rise in number of vaping-related deaths
and illnesses reported in the United States may also have changed
the companies' thinking.
SURGE IN YOUNG VAPERS
The Trump administration in the United States has announced plans to
remove all flavored e-cigarettes from store shelves due to rising
popularity among teenagers.
The share of high school students using e-cigarettes has more than
doubled over the past two years, with 27.5% reporting they had tried
an e-cigarette in the past month, according to preliminary federal
data. U.S. health officials are also investigating an outbreak of
hundreds of severe lung illnesses and nine deaths linked to vaping.
In its announcement on Wednesday, Juul also said it would not lobby
the administration over the proposed ban on flavored products.
Flavored e-cigarettes represent 80% of Juul's sales. The FDA's plan
to pull all e-cigarette flavors from the market, along with bans in
some markets, have pushed Juul's valuation down to about $25
billion, from $38 billion when Altria invested in it, according to
Morgan Stanley.
The FDA earlier this month warned the company about marketing its
products as safer than traditional cigarettes and requested more
documents and information within 30 days.
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Federal prosecutors in California are conducting a criminal probe
into Juul, the Wall Street Journal reported on Tuesday, though the
focus of the probe was unclear.
South Korea and India last week became the latest countries after
Brazil and Thailand to ban or warn about the sale of e-cigarettes.
Howard Willard, CEO of Altria, called vaping a key component of harm
reduction among smokers.
"We must acknowledge ... vaping is at an inflection point," he said
at the Global Tobacco and Nicotine Forum in Washington on Wednesday.
Willard urged tobacco companies to better educate the public on the
risks of smoking and vaping.
'FULL-FORCE' IQOS LAUNCH
Stifel analyst Christopher Growe said Altria, which holds the
license to sell iQOS in the United States, would embark on a
"full-force" effort to launch the product, taking advantage of being
the only tobacco-heating product approved for sale.
The company is expected to launch the product in Atlanta
"imminently" and then quickly broaden distribution, he said. Philip
Morris will sell iQOS in all other markets.
San Francisco-based Juul said it was replacing CEO Kevin Burns with
K.C. Crosthwaite, a Philip Morris USA veteran and most recently the
chief strategy and growth officer of Altria, a sign of Altria's
growing influence over Juul after its $12.8 billion investment in
the e-cigarette maker last December.
Bringing in a tobacco veteran to lead Juul is a chance to extend an
olive branch to the FDA and may indicate that Juul intends to work
with regulators. Altria has many more years of experience than Juul
dealing with regulators such as the FDA.
Burns, a former private equity executive who came to Juul in late
2017 from yogurt maker Chobani, presided over meteoric growth at the
company as it morphed from a 300-person startup to an international
operation employing thousands.
His tenure also coincided with the sharp rise in teenage e-cigarette
use and a regulatory crackdown on the industry.
Shares in Philip Morris rose 5.2%, while Altria fell 0.4%. Rivals
British American Tobacco and Imperial Brands Plc rose 3.3% and 2.3%,
respectively.
(Reporting by Siddharth Cavale and Nivedita Balu in Bengaluru;
Additional reporting by Chris Kirkham in Los Angeles; Editing by
Peter Henderson, Pravin Char and Lisa Shumaker)
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