Juul’s alliance with Altria helps both companies overcome Big Tobacco legacy
March 14, 2019 | Blog

Juul’s alliance with Altria helps both companies overcome Big Tobacco legacy

As Juul Labs continues to rapidly grow, the company’s decision to sell a majority stake to Altria Group, the parent company of Phillip Morris, is making increasing sense.

Altria’s nearly $13 billion investment into Juul Labs does not merely the boost the unicorn’s already lofty valuation but also gives Juul’s much needed experience with federal regulators who have been scrutinizing Juul’s failure to prevent teenagers from using its “alternative” smoking products.

Juul now enjoys a private valuation of $38 billion due to its popular vapor products that heat tobacco instead of burning it which releases more hazardous chemicals. According to Pitchbook, the company is projected to generate $3.4 billion in revenue this year, almost three times more than 2018.

Juul says its mission is to provide a way for smokers to stop using traditional combustible cigarettes. Last month, the company released a landmark study that claimed smokers who used its product over a 5-day period experienced a near identical drop in biomarkers related to cancer compared to smokers who abstained from smoking during that period.

Juul and Altria are both lobbying the Food and Drug Administration to, for the first time, to approve its claims that their products are safer than cigarettes. For Juul, Altria offers a good deal of experience in navigating the FDA. The agency is currently in flux as FDA Commissioner Scott Gottlieb, a strong critic of Juul and e-cigarettes, is resigning.

Juul runs into some problems

Juul has portrayed itself as the anthesis to Big Tobacco, the company that has really taken smokers’ interests to heart. But Juul recently faced enormous scrutiny, especially from the FDA, because its products, especially the flavored ones, proved especially popular with underage teenagers.

The result of the FDA’s review of Juul’s marketing practices is not merely a bout of bad publicity. The agency could possibly reject Juul’s claims that its vaping products are healthier or safer than traditional cigarettes, especially if it determines the company purposely targeted underage kids.

“Our intent was never to have youth use JUUL products,” CEO Kevin Burns said in a statement. “But intent is not enough, the numbers are what matter, and the numbers tell us underage use of e-cigarette products is a problem.”

“We are not perfect,” he said. “We are constantly learning and getting better at what we do.”

Burns is essentially saying that Juul needs help in these matters. So who has experience with retail distribution, communicating with the FDA, and designing campaigns and programs to stop underage teen smoking?

Big Tobacco. Hence the investment from Altria.

New direction for Big Tobacco

Like Juul, Altria has been trying to popularize “healthier” tobacco products that will help smokers transition away from traditional cigarettes.

In 2008, Altria spun off Phillip Morris International (PM) which owns the Marlboro brand, so the unit could focus on emerging markets. But the two companies also jointly created an electronic smoking device called IQOS that heats, not burns, tobacco.

The company sells IQOS in places like Great Britain, Japan and South Korea. But PMI has been lobbying FDA to approve the product, which Altria will market and distribute in the United States.

As smoking rates plummet in the United States, tobacco companies like PMI have been searching for new revenue streams, including products like IQOS that can help wean smokers off cigarettes.

To gain credibility with consumers, PMI has asked the FDA permission to describe these products as “reduced risk.” Like Juul, the company has invested considerable resources in scientific studies and clinical trials to prove IQOS are safer to smoke than regular cigarettes.

But that might be a tough sell, given Big Tobacco’s history of misleading the public on addiction and the dangers of smoking. But the company hopes transparency and rigorous science will win consumers over.

“People are going to be skeptical, and they're right to be skeptical,” PMI spokesman Corey Henry previously told me. “But our position is you don't have to trust us, and you shouldn't automatically trust us.”

“Take a look at the information yourself and do so with an open mind and see if you arrive at the same conclusions that we do,” he said. “We've got 200 peer-reviewed studies of our science. All of the science we've submitted to FDA will become available through our application.”

The fact that PMI chose to pursue FDA approval for its claims is significant in itself, given the historically contentious relationship between the industry and the country’s top regulator for consumer products.

“For us going through the FDA process, hopefully they'll arrive at the same conclusions that we have,” Henry said. “But it does sound a little counterintuitive that a tobacco company is welcoming the opportunity for a government health agency to review its data. But for us that's incredibly important to have that opportunity for them to do so.”

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Thomas Lee

Thomas Lee

Thomas Lee is the Senior Writer at SharesPost. He was previously a business columnist at the San Francisco Chronicle. Lee has written for the Star Tribune in Minneapolis, St. Louis Post-Dispatch, and Seattle Times. He is author of “Rebuilding Empires” (St. Martin's Press), his book on the future of big box retail in the digital age.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

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This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.