No smoke screen: Juul’s alliance with Phillip Morris helps both companies overcome Big Tobacco legacy
January 2, 2019 | Blog

No smoke screen: Juul’s alliance with Phillip Morris helps both companies overcome Big Tobacco legacy

Altria Group’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.

In turn, Juul offers Altria, the parent company of Phillip Morris, something the it has failed to achieve despite spending billions of dollars in marketing and lobbying: the prospect of convincing a skeptical public that Altria truly wants to abandon its “Big Tobacco” legacy.

Juul now enjoys a private valuation of $38 billion due to its popular vapor products that heat tobacco instead of burning it, the latter which releases more hazardous chemicals. Juul says its mission is to provide a way for smokers to stop using traditional combustible cigarettes.

But Juul CEO Kevin Burns acknowledged that its alliance with Altria might prompt critics to say that it sold out to Big Tobacco and thus betrayed its mission.

“We understand the controversy and skepticism that comes with an affiliation and partnership with the largest tobacco company in the US,” Burns said in a statement. “We were skeptical as well. But over the course of the last several months we were convinced by actions, not words, that in fact this partnership could help accelerate our success switching adult smokers.”

For one thing, Altria has been trying to do what Juul has already accomplished: popularize “healthier” tobacco products that will help smokers transition away from traditional cigarettes.

New direction for Big Tobacco

In 2008, Altria spun off Phillip Morris International 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. Something similar to Juul.

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

So PMI dispatched some its top executives to visit government officials and journalists, including myself at the time, to discuss the technology.

“The principle behind this technology is to develop a product that can allow the smokers to have the experience of smoking, the bits that they enjoyed when they smoke, but hopefully separate that out from their exposure to the harmful chemical substances that are in smoke,” Ruth Dempsey, PMI’s former chief scientist and current director of external relations, told me.

“In a classical cigarette, the nicotine and the taste and the aromatics actually come off at much lower temperatures because those are native parts of the tobacco and they can be released through heating of tobacco rather than the actual from burning,” she said.

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.” The company has invested considerable resources in scientific studies and clinical trials to prove IQOS are safer to smoke than regular cigarettes, Dempsey said.

“Before we put the product on the market, we want to make sure that smokers understand this is not a risk-free product,” she said. “Nicotine after all is not risk-free. But it may be a better alternative to smokers who would otherwise continue to smoke. That’s one element we want to see, is whether or not they understand and find that product attractive.”

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 said. “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. 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.”

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. However, the company popularized its heat-not-burn vaping technology not with FDA-sanctioned health claims but with appealing industrial design and marketing buzz.

But Juul recently faced enormous scrutiny, especially from the FDA, because its products, especially the flavored ones, proved especially popular with underage teenagers.

“Our intent was never to have youth use JUUL products,” Burns said. “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.

Prior to the alliance, some Wall Street analysts actually predicted Juul’s problems’ with the FDA would actually help Altria/PMI get their IQOS technology approved in the United States.

IQOS devices are methanol, not flavored based like Juul’s products, and therefore less attractive to teenagers, said Wells Fargo analyst Bonnie Herzog.

Investors should watch to see when the FDA approves IQOS devices and whether these products provides the sales lift Altria and PMI want. They should also pay attention to a possible IPO for Juul, given the sizable stake Altria now owns in the unicorn.

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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

CONFLICTS

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.