By Jennifer Maloney and Cara Lombardo
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 26, 2019).
The chief executive of e-cigarette startup Juul Labs Inc.
abruptly stepped down on Wednesday, as U.S. efforts to combat
underage vaping threaten to upend the trendy alternative to
smoking.
Questions around the future of Juul and vaping regulations also
prompted two tobacco giants, Altria Group Inc. and Philip Morris
International Inc., to call off talks about a potential merger.
Juul, which is the target of several federal investigations,
replaced Chief Executive Kevin Burns with an executive at Altria,
which owns a 35% stake in the e-cigarette maker. Juul also said it
wouldn't fight a proposed U.S. ban on most e-cigarettes.
At an all-hands meeting Wednesday at Juul's San Francisco
offices, the newly anointed boss, Altria veteran K.C. Crosthwaite,
told employees his appointment wasn't a sign that the Marlboro
maker was taking over, a person familiar with the matter said.
Juul faces a potentially crippling U.S. ban on most of its
products and cited the need to focus on regulatory matters for the
leadership shift. The fast-growing company said it would suspend
all broadcast, print and digital advertising on its U.S.
products.
Merger discussions between Altria and Philip Morris, which split
apart a decade ago, were spurred in part by the threat Juul posed
to their traditional businesses as some smokers switched away from
cigarettes.
The two sides had been negotiating for weeks but the Philip
Morris board became increasingly uncomfortable with the deal amid
the shifting U.S. regulatory environment, according to people
familiar with the matter.
Trying to salvage the merger talks with Philip Morris, Altria
raised the possibility of a leadership change at Juul, some of the
people said. But the Philip Morris board remained divided and
without unanimous support, the people said, the parties decided to
abandon the merger.
Altria and Juul both said Wednesday the leadership change was
Juul's decision. Mr. Burns told staffers that after taking a small
startup and building it into a global company with thousands of
employees, he was ready to hand over the reins.
Altria and Philip Morris said they would focus on the launch of
their own joint cigarette alternative in the U.S., a heat-not-burn
tobacco device called IQOS. Unlike Juul, IQOS has been reviewed and
authorized by the Food and Drug Administration.
Shares of Altria fell 0.4% in trading on Wednesday, while stock
in Philip Morris, many of whose investors opposed the potential
deal, gained 5.2%. Shares of both companies have slumped this year,
amid signs that traditional cigarette sales were slowing and
concerns about the potential merger.
Altria CEO Howard Willard said the proposed U.S. ban on
e-cigarette flavors would hurt Juul's business and vaping products
next year, but it was unclear exactly what restrictions the FDA was
preparing.
"I continue to believe Juul will continue to be successful and a
good investment for Altria in the long run," Mr. Willard said in an
interview, noting that Juul's products have converted millions of
adult cigarette smokers in the U.S. and are entering new markets
abroad.
Mr. Willard said that Mr. Crosthwaite, who headed up Altria's
IQOS efforts, would "work in a responsible way" with the FDA and
other regulators to address youth vaping. Mr. Willard said he was
still confident Juul could get approval from the FDA when the
company submits applications for review next year.
Citing the surge in underage vaping, President Trump's
administration said earlier this month that it planned to ban all
e-cigarettes except those formulated to taste like tobacco.
The banned flavors, including mint and menthol, represent more
than 80% of Juul's sales.
U.S. health officials viewed e-cigarettes as a safer alternative
to smoking and allowed products like Juul to remain on the market
before they were reviewed by the FDA. Juul and others now face a
May 2020 deadline to apply for FDA review of any vaping product
they want to sell beyond that date, including flavored
e-cigarettes.
Juul is still conducting clinical trials on its products,
including mint and menthol flavors, to gather information that it
plans to submit by May, according to people familiar with the
matter.
Altria pulled its own e-cigarettes last year when it decided to
invest in Juul. Meanwhile, rival Reynolds American, which sells
Camel and Newport, plans to file in the coming weeks for FDA review
of its Vuse e-cigarettes, whose sales have been dwarfed by Juul.
Reynolds American is the U.S. unit of British American Tobacco
PLC.
Federal health officials and antitobacco groups blame Juul for a
sharp rise in underage vaping. Juul said that it hasn't targeted
teens, that it has taken steps to combat underage purchases and
that its products are intended for adult cigarette smokers who want
to switch.
Mr. Burns, a former partner at private-equity firm TPG Capital
and executive at yogurt maker Chobani, joined Juul in December
2017. The startup was growing quickly and its sleek vaporizers,
introduced in 2015, had already become a teen status symbol and
growing problem in U.S. schools.
In 2018, Juul struck a deal with Altria, which invested $12.8
billion in Juul for its 35% stake and several board seats that are
pending antitrust review. Mr. Crosthwaite became a nonvoting
observer on the board. The deal valued the startup at $38 billion
and made many of its employees millionaires.
Now, Juul is the subject of several investigations, including a
criminal probe by prosecutors in California, The Wall Street
Journal reported this week. It also faces investigations by the FDA
and Federal Trade Commission into its marketing and business
practices.
U.S. health officials have urged adults to stop vaping while the
federal Centers for Disease Control and Prevention investigates a
rash of respiratory illnesses that have sickened hundreds of people
and caused eight deaths. Juul hasn't been linked to the
illnesses.
Juul's U.S. sales fell in August as officials raised the alarm
about the illnesses, dropping to $278 million in the four weeks
ended Sept. 7 from $294 million in the four weeks before that,
according to a Wells Fargo analysis of Nielsen data.
Ned Sharpless, the acting FDA commissioner, said the agency
moved too slowly to avoid the vaping health crisis. "We're going to
catch up," Dr. Sharpless said Wednesday amid criticism of the FDA's
response at a congressional hearing.
--Thomas M. Burton contributed to this article.
Write to Jennifer Maloney at jennifer.maloney@wsj.com and Cara
Lombardo at cara.lombardo@wsj.com
(END) Dow Jones Newswires
September 26, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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