Juul to remain on the market after appeals court pauses FDA ban

Cowen Managing Director and Senior Research Analyst Vivien Azer joins Yahoo Finance Live to discuss the pause on the FDA ban of Juul products, Altria's e-cigarette portfolio, and the outlook for tobacco producers.

Video transcript

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BRIAN SOZZI: Juul is getting a temporary pardon after a federal appeals court granted the e-cigarette company freedom to keep the product on the market pending further review of the FDA's previous decision to ban it. Joining us now to discuss what this means for Juul is Cowan Research analyst Vivien Azer. Vivien, good to see you as always. So what's the next step here for Juul?

VIVIEN AZER: So as you rightly said, they did pursue an appeals process with emergency injunctive relief, which the company was granted on Friday. That's critically important because the FDA reportedly has pursued enforcement action in a very quick fashion, with retailers being asked to de-stock the products as of Thursday's release of the marketing denial order. So they will pursue legal action as a remedy. And they will remain on the marketplace in the meantime.

JULIE HYMAN: Vivien, it's Julie here. Give us a little context as to how important this is for Altria, this Juul product, because it hasn't put all of its eggs, e-cigarette-wise or future cigarette-wise in this basket. But still, it's been a really important bet for them.

VIVIEN AZER: Well, on the e-cigarette side, they in fact did put all their eggs in that basket. So in December of 2018, they invested $12.8 billion for a 35% stake in Juul. There was a non-compete that was part of that. And so Altria walked away from their own innovations, namely Mark 10. And they were completely reliant upon Juul.

Now, the value of that stake has gone down to $1.6 billion as of the first quarter of 2022, so a very meaningful reduction, but it still doesn't release Altria from the non-compete. The value of that $12.8 billion Juul stake has to fall by 90% or more for Altria to take their own path on e-cigarettes.

So unfortunate given the mounting challenges around reduced risk products that Altria is facing, given the pending acquisition of Philip Morris International of Swedish Match, which could put in jeopardy Altria's access to the heat-not-burn proposition Iqos, which they had for a time been able to sell in the United States.

BRAD SMITH: And so for the broader e-cig market kind of facing this flash point in this kind of major moment, inflection point but to the downside, does that also have an effect on some of these other companies that had really baked a lot of their future kind of estimations and their growth strategy on what the e-cig category could be?

VIVIEN AZER: So e-cigarettes is still a $7 billion category in the US. So while it's certainly had its challenges and took a dip when novel characterizing flavors were removed. Juul was proactive in doing that in the spring of '19. No more mango, no more cucumber. The category is back in growth mode.

And it seems that the FDA's aspirations around cigarette regulation would indicate that they expect the e-cigarette category to remain viable and a landing spot for cigarette consumers that migrate away because the FDA is pursuing two strategies in cigarettes that suggest that they do want to move consumers down the risk continuum. Currently, they're going through the proposed rulemaking process to ban menthol cigarettes. That started in April of this year. That's a 12-month process. It'll be followed up by litigation.

As well on Wednesday night, the FDA and the Biden administration formalized their aspiration to move forward with proposed regulation to lower the level of nicotine in all cigarettes by 95% percent.

BRIAN SOZZI: So Vivien, given all these mounting challenges, to your point, I mean, should investors just totally ignore this space?

VIVIEN AZER: We published an analysis this morning looking at how Altria shares have responded to FDA announcements that proved disruptive to the stock price. So in 2017, Altria's multiple took about five months to recover. And in 2018, it took about four months to recover. But those announcements didn't have as significant implications in terms of the strategic outlook as we think the mounting challenges have for Altria right now.

JULIE HYMAN: It's interesting, Vivien, one wonders-- I mean, the other strategy that Altria could take is not to appeal, or Juul could not appeal. And then perhaps Juul would fall below that threshold that you were talking about, that valuation threshold, under which then Altria could pursue other technologies. Is that ultimately what could end up happening anyway?

VIVIEN AZER: I mean, that could very well happen. I don't think that that's kind of the desired first step. If you think about Juul's competitive positioning in the marketplace, I mentioned that they do have a 33% share. They have been ceding share to British American Tobacco. They have a 35% share in Nielsen-tracked channels with views.

But the e-vapor category through convenience and gas stores is very tight from a competitive standpoint. So being able to move in as a disruptor is certainly going to be more costly to Altria than continuing to lean into that Juul investment.

BRAD SMITH: Vivien Azer, who's the Cowen managing director and senior research analyst, thanks so much for helping us break this down. Vivien, appreciate it.