The Future of the US E-Cigarette Industry Amidst FDA Scrutiny

Jul.11.2022
The Future of the US E-Cigarette Industry Amidst FDA Scrutiny
Despite FDA lifting the ban, the e-cigarette industry is still under scrutiny; analysts say the category is still viable. Altria, as a major investor of Juul, suffered significant losses. FDA proposed to restrict flavored and menthol cigarettes and cigars. The e-cigarette category is expected to remain viable as a smoking alternative.

Despite the United States Food and Drug Administration's (FDA) decision to temporarily lift the ban on the sale of Juul, the e-cigarette industry continues to face another crackdown.


Although the struggle with the FDA is unique to Juul, the industry has been facing continuous scrutiny, specifically in regards to teenage use of electronic cigarettes. For example, in 2020, the FDA ordered e-cigarette manufacturers to cease production of unauthorized flavors. Juul voluntarily removed its signature mango and cucumber pods.


However, an analyst indicated that regulatory measures have not impeded growth.


Research analyst and managing director Vivien Azer of Cowen told Yahoo Finance that electronic cigarettes are still a $7 billion category in the United States. "When flavors such as fruit were banned, it certainly posed challenges and caused a decline... but the category is now back in growth mode.


Altria Group, the major investor in Juul, has suffered significant losses in recent weeks as the FDA banned the sale of Juul products in the United States for safety reasons. Juul has immediately appealed the FDA's decision, claiming that the agency ignored 6,000 pages of data on the safety of aerosols in its e-cigarettes.


According to Azer, in December 2018, Altria invested $12.8 billion in Juul Labs, which gave them a 35% equity stake and effectively put "all their eggs in one basket." The deal has been under review by the FTC, including a non-compete clause that limits Altria's ability to pursue their own electronic cigarette products.


She added, "As of the first quarter of 2022, the value of Altria's stock has dropped to $1.6 billion, which is significant, but it still does not release Altria from competition. The value of Juul shares, which amounts to $12.8 billion, must decrease by 90% or more in order for them to pave their own path in the e-cigarette industry.


Despite Altria's goal to reintroduce its iQOS heated non-burning tobacco device to the US market in 2024, the Marlboro manufacturer has slowed down due to patent disputes with competitors.


On Wednesday, health officials in California declared that electronic cigarettes pose a health threat and should be subject to strict regulation similar to tobacco products. They joined forces with health advocates to call for tighter controls on e-cigarettes.


Since the outbreak of the pandemic, the performance of Philip Morris International (PM) and other tobacco companies has been strong, with losses being recovered.


The Morgan Stanley Capital International World Tobacco Index has revealed a 15.07% return on investment in the tobacco industry for 2021. Philip Morris International controls 40.39% of the index fund's $379 billion market value, which amounts to $153 billion. Other brands featured in the index include Altria, British American Tobacco (BTI), Swedish Match (SWMAY), Japan Tobacco, and Imperial Tobacco.


The FDA's ban on Juul may pose a significant regulatory risk for the industry as a whole, but Azer asserts that e-cigarette companies expect the category to remain viable as an alternative to smoking.


She added that the US Food and Drug Administration is implementing two cigarette strategies.


In addition to the controversial Juul ban, the FDA has proposed restrictions on the sale and production of flavored cigarettes and cigars containing menthol. The American Medical Association supports this move and a ban on menthol may reduce smoking activity by 15.1% over 40 years, potentially saving the lives of 324,000 to 654,000 individuals.


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