With a sleek product that became a hit among 20-somethings and a headquarters in a trendy part of San Francisco, e-cigarette start-up Juul Labs long occupied a different world from Big Tobacco. As it grapples with a public backlash over teenage vaping and the emergence of mysterious health problems linked to the habit, however, the company is increasingly having to become more like the industry it set out to upend.

This week, grizzled veterans of tobacco’s protracted legal and regulatory battles moved closer to taking control of Juul. Nine months after Marlboro maker Altria struck a $12.8bn deal to acquire a 35 per cent stake, Kevin Burns has been replaced as Juul’s chief executive by the tobacco giant’s chief growth officer, KC Crosthwaite.

The change was announced just as talks ended over a $200bn merger between Altria and Philip Morris International, a collapse caused in large part by investor worries about the former’s investment in Juul.

For all the immediate drama, Altria remains hopeful its investment in Juul will pay off in the longer term. Give it five years, predicted Altria’s chairman and chief executive Howard Willard after his company’s talks with PMI broke down without a deal, and Juul will be back on the front foot.

By then, Mr Willard told the Financial Times at the Global Tobacco and Nicotine Forum in Washington, “I believe Juul will have navigated the challenges” associated with a surge in vaping among American schoolchildren.

“They’ll be a highly responsible player that leads in the US e-vapour market, and a leader in many markets overseas. But it’s going to take a significant amount of work — and a significant amount of investment — to navigate the next year or two,” he said.

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For now, there is no let up in the scrutiny of Juul. Nancy Brown, head of the American Heart Association, said the installation of Mr Crosthwaite — who has taken charge with immediate effect — showed Juul was “fully embracing its identity as a tobacco company that prioritises profits over public health”.

US medical officials have linked 805 cases of lung damage, and 10 deaths, to e-cigarette use. They have not blamed Juul — indeed, in many cases, they have found that those who have fallen ill inhaled products containing THC, a psychoactive compound in cannabis — but as the largest and best-known vaping company, it has borne the brunt of the backlash.

Tony Abboud, executive director of the Vapor Technology Association, said: “If the current hysterical narrative from public health officials continues, people will be smoking many more cigarettes than they are. The narrative is scaring people away [from alternatives].”

Juul is also blamed for getting a new generation hooked on nicotine, despite the company’s efforts to restrict sales to youngsters. The National Youth Tobacco Survey found about a quarter of high school students had vaped in the past month.

President Donald Trump has threatened to ban flavoured e-cigarettes, while regulators in several states from New York to California have laid down plans for their own restrictions. Moreover, in a sign the regulatory uncertainty is enough to hurt sales, US retailer Walmart, which stocks Juul, said last week it would stop selling e-cigarettes altogether.

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Juul’s explosive sales growth has recently begun to moderate, according to Nielsen data cited by Wells Fargo. Year-on-year sales rose a third in the four weeks to September 7, a slowdown from the 50 per cent expansion recorded during the previous four-week period. 

Even so, many in the industry are sceptical that Mr Trump will follow through on his threat for an outright ban, not least because of Republican opposition.

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And while campaigners were critical of Mr Crosthwaite’s appointment, having a longstanding tobacco executive in charge could ultimately work in Juul’s favour. Part of the company’s recent problems, said industry consultant Erik Bloomquist, was down to it underestimating the degree of opposition from anti-tobacco activists.

Mr Bloomquist, who at one time consulted for Juul, said it had been run by “very smart people from top universities”. He added that Mr Burns, a former president and chief operating officer of Chobani, “had a really strong operating background in yoghurt . . . But there were very few people in the business with tobacco experience”. 

By contrast, he said, Altria was “adept at aligning itself with regulatory concerns: it works well with regulators and has longstanding relationships with them”. 

In announcing Mr Crosthwaite’s appointment, Juul noted its incoming chief had “played a key role” in convincing the US Food and Drug Administration to give the regulatory thumbs up to IQOS, another cigarette alternative device Altria is to start selling in the US in partnership with PMI. 

“He’s one of the reasons I continue to have confidence in the investment in Juul,” said Mr Willard, adding he was “comfortable” with Altria’s existing 35 per cent stake in the company. Mr Crosthwaite has “significant experience dealing with a highly regulated industry, addressing concerns from a variety of stakeholders”.

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Industry lobbyists have voiced concerns that the regulatory crackdown on vaping could encourage smokers who are trying to quit to revert, yet Mr Willard said he was doubtful.

“In the long-term, I don’t think that’s the pattern I would expect to see,” he said, predicting that a decade from now traditional cigarettes would account for less than half the market.

“Consumers are highly likely to move. We have more compelling non-combustible tobacco products in the US than we’ve ever had, and we have a regulator that stands ready to authorise new products.” 

Should Mr Willard be proved correct that Juul’s long-term future is bright, some analysts believe PMI could eventually resume its tie-up talks with Altria. Bonnie Herzog, analyst at Wells Fargo, said she “wouldn’t be surprised” if the pair tried to revive their deal “when the environment is better”.

Via Financial Times