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The FDA Could Soon Crown This E-Cig Maker King

The Food and Drug Administration (FDA) is trying to remove one of the biggest, most popular electronic cigarettes from the market, opening the way for its rival to become the unassailable leader in smoking alternatives.

Although the regulatory agency delivered what appeared to be a death blow to Juul Labs by rejecting its marketing application for the Juul device and requiring it to take all its products off store shelves, Juul won a temporary reprieve from an appeals court, which stayed the order until it can decide on the merits of the case.

Juul is partially owned by tobacco giant Altria (NYSE: MO), which acquired a 34% stake in the e-cig maker in 2018 for $12.8 billion. If Juul cannot convince a court that the FDA's decision is "arbitrary and capricious and lacks substantial evidence," as it contends in its filing with the U.S. Court of Appeals for the D.C. Circuit, it will be a knockout punch for what at one time was the dominant e-cig that may ultimately lead to bankruptcy.

It would be an inglorious end to this one-time high flier that saw its fortunes falter as it came under FDA scrutiny for increased teenage e-cig usage, but one that would open the gates for Altria rival British American Tobacco (NYSE: BTI) to virtually own the market with its Vuse e-cig.

Image source: Getty Images.

Hail to the new king

Juul had been the undisputed e-cig leader with a near-80% share of the market, but the FDA hammered the company over its design, marketing, and ingredients, which it alleged induced teenagers to take up vaping.

The agency cracked down hard on the e-cig industry, including retailers, by targeting illegal sales to underage users. The FDA also banned all flavored e-cigs, despite their popularity with adults, because teens also liked them.

Juul responded by launching a $30 million marketing campaign against teen vaping and came out in support of raising the legal age to buy tobacco, but the drumbeat of negative press surrounding the device took a toll on sales. Juul's market share evaporated, and Vuse surpassed Juul for the first time earlier this year.

Image source: Juul Labs.

The latest Nielsen data puts Vuse's share at 35.1% compared to 33.1% for Juul. Third-place NJOY is far behind the leaders with a comparatively microscopic 3.1% share. While NJOY and other e-cig makers will undoubtedly pick up a few Juul users after the device has been banned, it is British American's Vuse brand that will almost certainly be crowned the indomitable king of e-cigs.

Defeating all comers

British American Tobacco is on a roll. Last year, it secured a U.S. International Trade Commission ruling that Philip Morris International's (NYSE: PM) IQOS heated tobacco device infringed on its patents, and that device was prohibited from being imported and sold in the U.S.

Altria had partnered with Philip Morris, the global e-cig leader, to market and distribute IQOS in the U.S. It had already introduced it into three states and was planning to roll the device out nationally by the end of last year, but the ITC ruling put the kibosh on those plans.

Because Altria had also previously shelved its own MarkTen brand of e-cigs in favor of joining forces with Philip Morris, it is the only major tobacco company with no e-cig device of its own to sell and the FDA has all but wiped out the rest of its investment in Juul. As of the end of the first quarter, Altria has reduced the fair value of its Juul position to just $1.6 billion.

If the FDA is successful in killing off Juul, British American Tobacco will essentially have no roadblocks in its way to market dominance.

A profitable venture

Vuse turned profitable in the U.S. for British American in the second half of last year, and it's been able to grow its share because it discounted the device and the consumables to attract users. Earlier this month, it said it was now ready to raise prices on both, which with a major competitor removed from the market, should give the tobacco stock a big boost in profits.

Vapor revenue grew 59% last year to 927 million British pounds, while its own heated tobacco products, marketed under the glo brand, saw a 46% rise in sales to 853 million British pounds. While British American still generates 85% of its revenue from cigarettes and other combustible products, the smoking alternative segment is its fastest-growing business.

Now that the FDA has crowned it king of electronic cigarettes, look for vapor and heated tobacco sales to build a deep competitive moat that few rivals may be able to cross.

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Rich Duprey has positions in Altria Group. The Motley Fool recommends British American Tobacco and Philip Morris International and recommends the following options: long January 2024 $40 calls on British American Tobacco and short January 2024 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.


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