As Juul Flies High With New Funding, Vapes Become a Target

(Bloomberg) -- Investors are lining up behind Juul Labs Inc., a startup that makes electronic cigarettes popular with young people. But as vaporizers have taken off, the industry is under pressure from regulators and competitors.

Juul said in a U.S. securities filing posted Tuesday that it raised $650 million out of a funding round expected to reach $1.2 billion. The deal is set to value the business at about $15 billion, Bloomberg reported last month. Tiger Global and Fidelity Investments are among Juul’s biggest shareholders, according to publicly available disclosures.

But threats abound. After some success overseas, Philip Morris International Inc. is seeking approval to sell a vape product in the U.S., which would likely come with an overwhelming marketing budget. Meanwhile, officials and the public are waking up to the risks of vaping. Flavored nicotine was banned by voters in Juul’s hometown of San Francisco last month; regulators are scrutinizing the products; and vape devices may become a casualty in the U.S. trade war with China.

According to Nielsen data, Juul now claims 68 percent of the e-cigarette market, which is quickly encroaching on the traditional tobacco industry. In the past year, the share of cigarettes in the market for smoking and vaping has fallen by almost 4 percentage points, while Juul has gained 3.5 points.

Shares in Philip Morris International Inc. have dropped 22 percent this year. The tobacco titan has responded by pushing its own vape called iQos. The product is popular in Japan but has yet to receive regulatory approval for sale in the U.S. Philip Morris has said it’s not giving up.

Scott Gottlieb, commissioner of the U.S. Food and Drug Administration, has described vaping as a public health crisis for young people. In April, Gottlieb asked Juul to disclose documentation related to its marketing strategy to determine whether the company targets teenagers. The FDA also asked Juul to provide research about the potential health consequences of vaping.

Juul has said its mission is to help smoking addicts by providing safer alternatives to tar-burning cigarettes. The company said customers must be 21 years old to purchase the product and that it doesn’t market to teens. Users say they appreciate Juul’s sleek design, resembling a USB flash drive. The device discretely heats pre-filled nicotine pods to deliver a powerful buzz. Sales of Juul vaporizers and pods have swelled more than eightfold in the past year, according to an analysis by Wells Fargo.

But last month, residents of Juul’s hometown of San Francisco voted to ban the sale of flavored tobacco products. The referendum could serve as a model for other cities looking to crack down on nicotine products that appeal to teens. Juul sells pods with mango, cucumber and creme brulee flavors. They’re manufactured in the U.S. and cost about $16 for a pack of four. Vaporizers sell for $35.

Another potential hit could come from U.S. President Donald Trump. Vape devices were included on a list of proposed Chinese products to incur a 25 percent tariff. Juul’s vape is made in Shenzhen. The Trump administration has yet to set an implementation date for the next round of taxes, and the plans could change. Juul declined to comment on tariffs or fundraising.

Although the industry is opposed to the tax, it wouldn’t be the end of the vaping business, said Gregory Conley, president of the American Vaping Association, an advocacy group. “Pods are where Juul makes its money,” he said. 

©2018 Bloomberg L.P.

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