Altria Rues the Day it Plowed $13 Billion into Super-Unicorn Juul

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Wolf Richter,

Dark Side Comes to the Fore: Juul is the Second Highest Valued US Unicorn, Behind WeWork Which Crashed & Burned. Now it’s Juul’s Turn.

Now there’s Juul Labs, the second most highly valued startup in the US, behind WeWork. WeWork already crashed and burned.

WeWork’s “valuation” was set at $47 billion behind closed doors by a handful of people with the sole purpose of unloading the shares in an IPO at the maximum price. But in trying to entice investors into the IPO, the unofficial number kept falling, and by the time it had plunged nearly 80% to $10 billion, the IPO was scuttled, and the CEO is now facing a palace revolt by WeWork directors.

Now it’s Juul’s turn, for different reasons. A slew of federal and state regulators and state prosecutors have homed in on Juul’s marketing practices and deadly products.

And this afternoon, it was revealed that, according to sources of the Wall Street Journal, federal prosecutors in the US attorney’s office of the Northern District of California are conducting what is the first federal criminal probe into Juul. “The focus of the probe couldn’t be learned,” the WSJ said.

Juul, a San Francisco startup, dominates the e-cigarette market in the US. It raised $13.6 billion during its fund-raising rounds. Of this amount, $12.8 billion was invested by cigarette-giant Altria Group [MO] last December, in return for a 35% equity stake. The deal gave Juul a “valuation” of $38 billion.

Juul’s revenues reached $1.3 billion in 2018 and as of February were expected to reach $3.4 billion in 2019. These estimates predated the respiratory illness fiasco.

Juul has obtained this valuation and these revenues by making deadly smoking cool again and calling it “vaping.” E-cigarettes are particularly favored by middle school and high school kids. According to the CDC, last year, the number of middle and high school kids using e-cigarettes jumped by 70%, from 2.1 million in 2017 to 3.6 million in 2018, with 5% of middle school students and 21% of high school students reporting that they had vaped in the past 30 days.

So far this year, according to preliminary results, the use among high school students has jumped further, with 27.5% reporting having vaped in the past 30 days – flavored products being all the rage.

Vaping was a sideshow until Juul came along in 2015 and figured out how to make vaping look appealing to teens. It turned vaping into a high-growth industry, with Juul at the forefront.

At least eight people are now known to have died in recent weeks and over 500 have been hospitalized with severe respiratory illness after smoking e-cigarettes. Now that the digging has started, the media is unearthing more evidence on e-cigarettes’ connection to these lung illnesses in medical journals, going back to the beginning of e-cigarettes.

And regulators, who’ve been asleep until last year, are getting nervous.

The Food and Drug Administration (FDA) was the first regulatory agency to raise alarms about Juul’s marketing campaigns and started investigating in April 2018.

In May 2019, North Carolina became the first state to file a civil lawsuit against Juul, accusing it of targeting teens and of misrepresenting the strength of nicotine in its products and the addictiveness of that nicotine.

Then the events of the respiratory illnesses boiled to the top. By early September 2019, the Center for Disease Control (CDC) recommended that people “consider refraining from using e-cigarette or vaping products.”

The FDA’s Office of Criminal Investigations is investigating the respiratory illness, with an eye on the supply chain of the products that are being vaped.

The FDA is also investigating Juul’s ads and political fliers because Juul is fighting a number of political moves to ban or limit the sale of its products at the local and state levels. Michigan has banned various flavored e-cigarette products. And among the cities to act, its hometown San Francisco has banned the sale of e-cigarettes in the City.

Juul has come out swinging, trying to overturn the San Francisco ban at the November election. To that effect, it has succeeded in getting Proposition C on the ballet. The campaign to back Prop. C is entirely paid for by Juul. In its ads and political fliers backing Prop. C, Juul claims that vaping is safer than smoking cigarettes. This is the whole logical reason for its product: claiming that it’s a safer alternative to cigarettes.

But the FDA had already announced on September 9, that it had sent a warning letter to Juul “for marketing unauthorized modified risk tobacco products by engaging in labeling, advertising, and/or other activities directed to consumers, including a presentation given to youth at a school.” Specifically, the FDA had ordered Juul to immediately stop making the claim that vaping is safer than smoking.

Under federal law, Juul and other e-cigarette makers cannot make this claim or the claim that vaping helps people quit smoking cigarettes, unless the FDA has given them permission after reviewing scientific evidence that these claims are in fact true.

But even after the September 9 order to stop making the claim, Juul’s Prop. C propaganda has continued to claim that its products are safer than cigarettes.

Over the weekend, the San Francisco Chronicle reported that the FDA will investigate the political materials Juul has been deploying in San Francisco to determine if Juul is still illegally claiming that vaping products are safer than cigarettes — despite the order to stop making this claim.

And Walmart announced on Friday that it would stop selling e-cigarettes at its Walmart stores and Sam’s Clubs in the US after it depletes its current inventory.

This saga amounts to a broad and widening crackdown at all levels on the core of Juul’s business, which is to get young people addicted to its products so that they would buy them for the rest of their lives.

For Altria, which had paid nearly $13 billion for its 35% stake in Juul, it’s a very cold shower. Juul’s actual market value, if it ever gets this far, would be bogged down by the company’s ongoing all-out fight to just stay alive under the continuing onslaught of legal and political fire. And there is a good chance that Altria simply blew most of that $13 billion.



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