Juul Said It Would Disrupt Big Tobacco. They May Join Forces Instead

(Bloomberg) -- In November, residents of San Francisco's Dogpatch neighborhood gathered at a local city planning meeting to express their disgust at Juul Labs Inc. The 1,500-person company, which makes a nicotine vaporizer, had signed a sublease for office space in the area, a move some residents called "unconscionable" because Juul has been accused of marketing its wildly popular e-cigarette to minors. During the hearing, concerned parents and residents said Juul didn't belong in their neighborhood. Days later City Attorney Dennis Herrera asked the developer subleasing the city-owned property to provide documents showing Juul is complying with state and city requirements for handling hazardous materials like liquid nicotine and chemicals that may cause cancer.

"Juul is a tobacco company disguised as a tech company," said Christine Chessen, a mother of three who attended the hearing. "I am outraged to have Big Tobacco in our city."

The uproar highlights the tension surrounding Juul, which has branded itself a technology company on a mission to get addicted smokers off tar-burning cigarettes. Critics of Juul say it's getting rich selling nicotine products to young people, the same way cigarette companies did for decades.

Juul says it never intended to sell its product to teens and that it is a healthier alternative to cigarette addiction because its pods provide the same nicotine fix as a carton of cigarettes, without the same tar-burning carcinogens.

Now recent developments have complicated that argument. Juul is engaged in conversations to sell a significant minority stake of itself to tobacco company Altria Group Inc., said three people familiar with the negotiations who asked not to be identified because the discussion is private. Altria, which spun off Philip Morris International in 2008, sells brands like Marlboro in the U.S. Spokesmen for Juul and Altria declined to comment.

A partnership between the two companies would solidify what critics allege is a longtime connection: Juul, they say, has used practiced tactics by cigarette makers to addict kids.

"Altria’s sordid history of spending billions to entice kids to smoke, and Juul’s breathtaking success at hooking a new generation of children on nicotine, could mark an historic setback for lifesaving tobacco control efforts,” Nancy Brown, the chief executive of the American Heart Association, said in a statement provided after news of a potential Altria and Juul deal broke.

A deal with Altria could help Juul meet demand for its popular products, fight regulators and expand globally -- Juul aims to sell in 12 more countries in Europe and Asia by mid-2019, said the people. The transaction could close by the end of the year, the people said.

Word of the deal is already causing consternation among some of Juul's employees, said two people at the company, who asked not to be identified because they are not authorized to speak publicly. On Friday, Axios reported that internal employee messages called the potential tie-up with Altria a "deal with the devil."

Two of Juul's investors expressed concern that the company would betray its mission if a deal with Altria were made. The investors, who asked not to be identified for fear of reprisal from Juul's board and other investors, expressed concern that Juul was now creating a new generation of nicotine addicts and said if Juul partnered with Altria it would become harder to defend Juul's mission. This isn't what they signed up for, one of them said.

Juul is the brainchild of Adam Bowen and James Monsees, two Stanford graduate students, who used to swap business ideas on smoke breaks between classes. In 2004, they began tinkering with ways to disrupt the tobacco industry and just over a decade later they landed on a sleek pen-like device that delivers a smooth hit of vaporized nicotine.

In 2015, Juul launched with a flashy social media marketing campaign that featured peppy, young-looking models wearing letterman jackets, high ponytails and midriff-baring tops. (Juul said the ads featured models over the age of 23 and that the images had no impact on the company's sales.) By 2017, Juul's product became so popular that it became a verb: Juuling. Investors including Tiger Global Management and mutual fund manager Fidelity Investments poured capital into the business. Juul has raised $1.37 billion.

By 2018, Food and Drug Administration Commissioner Scott Gottlieb called Juuling an epidemic and began to investigate Juul for claims that it intentionally sold its product to minors. Juul says it fully complied with the investigation. The number of U.S. high-school students who reported using e-cigarettes like Juul rose 78 percent this year, according to the FDA and the Centers for Disease Control and Prevention. In April, 11 U.S. senators sent two letters to Juul warning that its products put "an entire new generation of children at risk of nicotine addiction."

"The Juul playbook is identical to what the tobacco industry has done for decades," said Matthew Myers, president of Campaign for Tobacco-Free Kids. "They claim to care about public health, then they engaged in marketing whose primary appeal was to kids," he said, noting that Instagram is not the obvious choice to market a product designed for older, already-addicted smokers.

For years, tobacco companies were criticized for cigarette flavors reminiscent of candies, such as "twista lime" and "winter mochamint." In 1972, according to the American Lung Association, cigarette maker Brown & Williamson wrote an internal report suggesting flavored cigarettes were to blame for teen addiction: “It’s a well-known fact that teenagers like sweet products." In 2009, after years of unsuccessful attempts, the FDA banned cigarettes with flavors other than menthol known to appeal to young people.

Last month, Juul said it stopped selling its fruit-flavored nicotine pods to stores and shut down its U.S.-based Facebook and Instagram accounts. The week prior, an FDA senior official said the agency would restrict sales of many flavored nicotine cartridges used in vaping devices.

Consumers must be 21 to buy vaporizers and pods on Juul’s website, and the company said it has pledged $30 million to fight underage use of its products. It’s working with EBay Inc., Alibaba Group Holding Ltd., Amazon.com Inc. and other online marketplaces to remove unauthorized listings of Juul products and counterfeits that could be sold to minors, and it asks social media platforms like Instagram to remove content of young people Juuling, it said.

Juul's spending on lobbying has ballooned to $890,000 through the first three quarters of 2018, up from $120,000 for all of 2017. The company has employed 16 lobbyists this year, disclosures filed with the Senate show. One of the new outside lobbyists is Chaka Burgess of Empire Consulting Group, who is on the board of the Congressional Black Caucus' political action committee. Over the years, Altria has been a major donor to the caucus's nonprofit Congressional Black Caucus Foundation.

There has long been a tortured relationship between the Caucus and cigarette companies. The financial ties between the two were strong for years, even as evidence surfaced that the industry heavily targeted menthol-flavored cigarettes to black consumers. According to the CDC, Menthol is thought to make harmful chemicals more easily absorbed, and even though black smokers usually smoke fewer cigarettes and start smoking later in life, they are more likely to die from smoking-related diseases than white people.

Earlier this year, Juul echoed another tobacco industry tactic when it offered to partner with K-12 schools for a youth smoking prevention program that included focus groups with young users. Marlboro began sponsoring youth prevention efforts in the 1980s. Both programs came under intense criticism as an exercise in brand building among impressionable young people. Juul says it no longer reaches out to schools, and the company's chief administrative officer, Ashley Gould, told the New York Times in August that Juul didn't know that cigarette companies employed this strategy in the past. "We didn't know," she said. "We should've known."

"It's remarkable how similar their behavior is to Big Tobacco," said Myers. "The only difference is that Juul is destroying its credibility in a much shorter period of time than the cigarette companies did."

--With assistance from Bill Allison and Tiffany Kary.

To contact the editor responsible for this story: Emily Biuso at ebiuso@bloomberg.net, Mark Milian

©2018 Bloomberg L.P.