Tuesday, December 11, 2018


Banner Content
A JUUL vape 

Brianna Soukup | Portland Press Herald | Getty Images
A JUUL vape 

Juul has prided itself on its independence from Big Tobacco. It may not be able to much longer.

Juul designed its devices to look completely different from cigarettes. The company has used its autonomy — and its purported purpose of eliminating conventional cigarettes — to brush off those comments. That wasn’t enough to prevent attention from the U.S. Food and Drug Administration.

Today, Juul is able to market itself as an enemy of Big Tobacco, simply trying “to improve the lives of the world’s 1 billion adult smokers.” That will become much harder to do if it sells part of itself to Altria, the maker of top-selling cigarette Marlboro. However, in teaming up with Altria, Juul would gain regulatory expertise to help it manage the tricky waters that are becoming even choppier as the agency cracks down on rising rates of teen vaping.

Surging sales, growing scrutiny

Over the summer, Juul closed a $1.25 billion round that valued the company at $16 billion after a year of explosive growth for the company. At that point, Juul’s dollar sales had skyrocketed 783 percent in the 52 weeks ended June 16, reaching $942.6 million, according to a Wells Fargo analysis of Nielsen data. The e-cigarette category as a whole grew 97 percent to $1.96 billion in the same period.

Juul now represents more than 75 percent of the e-cigarette market, according to the Nielsen numbers. But Juul faced a growing and glaring problem: Anecdotal reports suggested many of its customers were teens. Federal data later proved a surge in teen e-cigarette use was underway.

All the while, Juul maintained its argument it was a health-focused company that wanted to help adults switch. And it wasn’t associated with any tobacco companies.

“We’re the No. 1 e-cigarette in the United States,” Juul’s Chief Administrative Officer Ashley Gould told The New York Times in April. “And we’re not a big tobacco company. We’re an independent company.”

Weeks after the story, in a rare move, the FDA issued a 904(b) letter requesting a slew of company materials, including marketing documents and research on whether certain products’ design features, ingredients or specifications appeal to different age groups.

In September, the FDA went even further, declaring teen e-cigarette use an epidemic and placing the blame on Juul and four other brands, including Altria’s MarkTen. Commissioner Scott Gottlieb ordered the companies to come up with a plan to reverse these trends.

The same month, federal authorities showed up at Juul’s San Francisco headquarters unannounced, seeking more information on the company’s sales marketing practices. They seized more than a thousand pages of documents. Juul CEO Kevin Burns in a statement said the company walked regulators through “every part” of its business, including its marketing practices and age-verification tools used on its online shop.

As the FDA scrutinized Juul and debated its next steps, the outcry grew even louder. Federal data proved parents and teachers weren’t wrong. In just one year, the number of high school students who used e-cigarettes increased 78 percent, equating to 20.8 percent of high school students.

It could not be determined how much of Juul’s business is teens, but some estimate it is significant. The FDA regulation could therefore represent pressure to Juul’s business. Meantime, Juul is spending millions of dollars to combat underage use and conduct clinical studies in order to prepare for an application it will eventually need to file with the FDA.

Weeks before the FDA announced how it would try to curb youth use, Altria in October said it would remove its MarkTen pod-based products and will stop selling all flavors except for menthol or tobacco in its cig-a-like products until the FDA reviews and approves them.

Juul said it suspended sales of fruity flavors in retail stores while continuing to sell these flavors on its age-verified website. Two days later, the FDA said it would restrict where these flavors can be sold, limiting them to age-verified stores such as tobacco and vape shops.

A fresh batch of skepticism

On its own, Juul has made a number of missteps. It tried to roll out a Juul-sponsored e-cigarette lesson plan in schools that critics have said is right out of Big Tobacco’s playbook. In this instance, Juul’s Gould told The New York Times the company wasn’t aware tobacco companies had also tried this tactic because Juul didn’t build its management around former tobacco employees.

Altria has decades of experience in handling regulatory and legal issues. Similar to Juul today, Altria faced enormous public pressure in the 1990s. It helped craft a deal between manufacturers and state attorneys general, known as the Master Settlement agreement, which established fixed amounts tobacco companies would pay annually and limited marketing in exchange for ending a wave of ongoing lawsuits.

But partnering with a cigarette maker exposes Juul to skepticism from those who have questioned the company’s mission to end cigarette smoking from the beginning. Each Juul pod contains as much nicotine as one pack of cigarettes.

“If Juul really wants to eliminate cigarettes, why would they even consider partnering with a company that not only makes the best-selling cigarette brand among kids, but has repeatedly fought efforts to reduce smoking?” Matt Myers, president of the Campaign for Tobacco-Free Kids, said in a statement.

Selling a portion of itself to a tobacco company could also spark internal backlash among people who joined Juul to execute its stated mission: “eliminate cigarettes by offering existing adult smokers with a true alternative to combustible cigarettes.”

Juul co-founder James Monsees told CNBC in an August interview that one of the biggest pride points at the company is having already converted more than 1 million smokers from combustible cigarettes. He said Juul is trying to attract people who could also work at tech companies like Tesla, Facebook, Google and Apple.

“And what that meant was for someone to come here instead, especially in the early days, they’d have to truly believe in our mission and want to be here to end smoking and to have one of the biggest impacts on public health in the history of the world,” he said.

Since spinning off from vaporizer maker Pax Labs last year, Juul has raised money from just a handful of investors, including Tiger Global, Fidelity Investments and Tao Capital markets. Despite being in the backyard of Silicon Valley investors, Juul has struggled to raise money from them.

Many venture capital firms aren’t allowed, based on their agreements with limited partners, to invest in anything related to alcohol, tobacco or guns. While Juul’s device isn’t technically a tobacco product, the addictive nature of nicotine and its popularity among kids has turned it into a toxic brand among start-up tech investors.

“People who don’t understand this issue don’t have kids in high school,” said Jeff Richards, a managing partner at venture firm GGV, who has four kids, the oldest of whom is a freshman in high school. “I’m acutely aware of how big a problem this Juul device has become.”

The two companies declined CNBC’s requests for comment. The Wall Street Journal first reported Juul’s talks with Altria, while Axios first reported its recent fundraising efforts.

— CNBC’s Ari Levy and Jeniece Pettitt contributed to this report.

WATCH: How Juul made vaping cool and became a $15 billion e-cigarette giant

0 Comments

Leave a Comment

Advertisement

Predator 21 x