E-cigarette maker Juul Labs Inc. is facing a growing round of legal challenges. School districts across the country are suing over the promotion of Juul devices, which they say target teenagers.
Any downside at Juul is also felt at Altria Group Inc. (NYSE: MO), which made a big investment in Juul in 2018. Altria is down about 21% year to date, but at least one stock market analyst recently said the stock appears to be undervalued currently. The Dow Jones industrial average is down 10.5% for the same period.
Considered an evolution in smoking, Juul generated a lot of buzz and aggressively marketed its e-cigarettes around the globe. Altria was so impressed that it invested $12.8 billion in 2018 for a 35% stake.
But the company faced a backlash after regulators linked the company to a spike in underage vaping. While teen cigarette smoking has declined over the past decade, schools were seeing a rapid increase in vaping, including use of the Juul device, which they said students could more easily conceal than traditional cigarettes.
Shaped somewhat like a computer flash drive, the Juul uses a liquid nicotine concentrate so it doesn’t emit a burning smell. The Centers for Disease Control (CDC) said 11.7% of students have used e-cigs, compared with 7.6% who used regular cigarettes.
Juul also came under fire for its sweet-flavored pods, which critics say were more attractive to youth. In response, the company voluntarily removed flavors like “Mango” and “Fruit Medley.”
Today, Juul pods only come in traditional tobacco and menthol flavors. Still, regulators and state attorneys general continue investigations into Juul.
Further damage came with the emergence of a mysterious vaping illness in 2019 that killed dozens. More research is needed, but scientists now think the disease is linked to vaping of oils containing THC, the psychoactive component found in marijuana. It doesn’t seem that e-cigarettes using nicotine are involved.
Still the CDC says e-cigarettes are only recommended for adult smokers who are trying to quit. “E-cigarettes are not safe for youth, young adults, and pregnant women, as well as adults who do not currently use tobacco products,” the CDC says.
Regulators in other countries have also taken a negative view on vaping. Juul has actually pulled out of some international markets, including South Korea and some European countries, over regulatory pressure.
In light of these headwinds, Altria took two big write downs on its investment. Last fall, Altria said the value of its Juul stake decreased by $4.5 billion. Then in January, the company took a $4.1 billion write down. Once valued at $38 billion by Altria, Juul was valued at only $12 billion.
In the latest legal news, a team of lawyers continues to sign up school districts across the country to take on Juul. The company isn’t the only manufacturer of e-cigarettes, but as the largest, it’s become an attractive target.
“Juul lured in a whole new generation of underage consumers with its deceptive marketing and created a youth vaping crisis that has now put the safety of our most vulnerable citizens at risk,” said Rahul Ravipudi, one of the lawyers involved in the case. “We are ready to hold Juul accountable, one school district at a time, and we won’t stop fighting until justice is served.”
In California alone, the plaintiffs have signed up 34 school districts. The suit seeks compensation for student absences and money for anti-vaping education programs.
Juul is also being asked to pay for costs associated with policing vaping among students, including extra staff and vaping detectors some districts have deployed in restrooms. “We are seeing school systems strained and having to expend valuable resources to protect their students from this major health crisis,” said John Fiske, another attorney on the case.
Juul has denied intentionally targeting youth, and has taken steps to improve its relationships with regulators. The company recently announced it was moving its headquarters from San Francisco to Washington.
Most tobacco companies, including Altria, fund initiatives to decrease underage smoking. On its website, Altria says it supports the Food and Drug Administration’s efforts to reign in vaping among teenagers and children.
In an interview with The Wall Street Journal last week, Juul CEO K.C. Crosthwaite said the company is working to regain the trust of regulators and focus on e-cigarettes as a way of quitting. “We’re going to continue to convert adult smokers,” he said.
“The opportunity for us and our company to eliminate combustible cigarettes, it’s historic,” said Crosthwaite, a former Altria executive. “And then the financial opportunity to do that, for our shareholders, is significant.”
If he’s right, Altria’s investment in Juul could eventually pay off.