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The FDA is cracking down on e-cigarettes. So why are e-cig makers' stocks soaring?

The FDA is cracking down on e-cigarettes. So why are e-cig makers' stocks soaring?
An unidentified 15-year-old high school student uses a vaping device near her school's campus in Cambridge, Mass. (Steven Senne / Associated Press)

It’s bad for business when regulators target one of your fastest-growing products — unless they also go after a competitor working to put you out of business.

That, in essence, is why the makers of some e-cigarette brands saw their stocks jump Wednesday after the U.S. Food and Drug Administration announced a crackdown on the products over concerns about how popular they’ve become among kids.

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The federal intervention — requiring e-cig makers to come up with detailed plans for curbing sales to minors or risk having their products pulled from the market — could be very bad news for Juul, the hot San Francisco company that almost overnight became the market leader in e-cigarettes. That means it could be good news for Big Tobacco companies including Altria, Imperial Brands and British American Tobacco.

Altria, the maker of Marlboro smokes, saw its share price rise nearly 7% on Wednesday. Camel maker British American Tobacco’s shares jumped 6%. Shares of Imperial Brands, the maker of Winston and Kool cigarettes, rose 3%. Juul is privately held.

All three of those companies compete with Juul in the e-cigarette market — but, unlike Juul, they also sell regular cigarettes, meaning a government crackdown on e-cigarettes doesn’t hurt as much. Ultimately, such a move could push Big Tobacco back into the lead in the e-cig market, analysts said Wednesday.

Bonnie Herzog of Wells Fargo Securities, who follows Marlboro maker Altria, wrote in a research note that Juul stands to be hurt the most by the FDA’s new action. She expects total U.S. sales of e-cigarettes to hit nearly $4 billion this year.

"Given the market's overarching concerns about Juul's impact on cigarettes, especially Marlboro, we think a potential ‘ban’ on Juul would be positive,” she wrote.

Of course, Altria and others risk having their own e-cigs banned too, but analysts say the big tobacco companies are in a much better position. For starters, they have more experience dealing with regulators and can more easily afford to temporarily pull their e-cigarettes if necessary, wrote analyst Christopher Growe of brokerage Stifel.

To comply with the FDA’s order, Growe speculated, e-cigarette companies would probably provide training programs for retailers, something he said would be easier for Big Tobacco firms to afford and pull off given their “vast resources already in place.”

Juul is the leading e-cigarette brand, with $1.3 billion in sales over the last 12 months, or more than half of the market.
Juul is the leading e-cigarette brand, with $1.3 billion in sales over the last 12 months, or more than half of the market. (Bill O'Leary / Washington Post)

What’s more, he said, e-cigarettes simply aren’t a big business for Big Tobacco, and may even be hurting those companies’ profits. If the FDA puts the kibosh on the whole e-cigarette industry, the financial hit would be small for Altria but huge for Juul.

Over the last year, Altria sold $37.2 billion in cigarettes and chewing tobacco, and just $229 million in e-cigs, according to Wells Fargo Securities and research firm Nielsen.

“Any immediate regulatory action would have minimal financial consequences on the companies,” Growe wrote. “They are marketing e-cigs in stores alongside their conventional cigarette products but each of these companies is likely still losing money in the endeavor.”

E-cigarettes have been around for years but started to gain popularity within the last five years. The battery-powered, hand-held devices heat nicotine-infused liquid into an inhalable mist, which users puff as if smoking a cigarette. Most e-cigarettes use replaceable, liquid-filled cartridges that come in a variety of flavors. Juul flavors include mango, cucumber and Virginia tobacco.

Flavors are of particular concern to the FDA. Scott Gottlieb, the agency’s commissioner, said Wednesday that “certain flavors are one of the principal drivers of the youth appeal of these products.” Analysts said this, too, gives Big Tobacco a leg up on Juul.

Wells Fargo’s Herzog said Altria has “limited/mature flavor profiles relative to Juul.” She also suggested that eliminating flavored products could push some e-cig users back to cigarettes.

Annie Jones, 21, of Santa Monica, is an occasional user of flavored e-cigarettes. She started smoking regular cigarettes about six years ago and she mostly switched to e-cigarettes a year and a half ago, when her mom got lung cancer. "She had to have one lung removed and it made me more aware," she said.

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She prefers fruity flavors and called the FDA decision to potentially take flavored products off the market "drastic.”

"A ban on flavored e-cigarettes would probably make me switch back to cigarettes," she said.

Juul, which hit the market in 2015, had a meteoric rise last year. Its device, which looks like a USB flash drive, quickly became the leading e-cigarette brand. Over the last 12 months, Juul had sales of nearly $1.3 billion, or about 56% of all e-cigs sold. British American’s Vuse e-cigs were a distant second, with sales of $404 million, according to Wells Fargo Securities and Nielsen.

Juul’s swift rise has been cause for concern for tobacco investors. Until last year, they had assumed that tobacco companies would control the e-cigarette market, giving them a potential growth market that would offset the steady decline in U.S. smokers, Growe said.

He said investors believed tobacco companies would be able to use their regulatory experience and financial muscle to maintain control of e-cigarettes, a notion that Juul challenged but that the FDA action now makes more likely.

“Today’s announcement brings that Big Tobacco regulatory advantage back into focus,” he wrote.

Times staff writer Aurora Percanella contributed to this report.

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