Altria Inc. shares slid 9% Wednesday, after a report that the Food and Drug Administration is preparing to order Juul Labs Inc., in which Altria owns a large stake, to take its e-cigarettes off the U.S. market.
The report by The Wall Street Journal cited people familiar with the matter as saying the decision could come as early as Wednesday. The marketing denial order would follow a nearly two-year review of data presented by the vaping company, which sought authorization for its tobacco- and menthol-flavored products to stay on the U.S. market.
Juul has been under regulatory scrutiny since its fruity flavors and marketing were blamed for a spike in teenage vaping about four years ago. The FDA has already banned it from selling flavors such as creme brulee, that proved highly popular with underage smokers.
Altria MO, -9.18% paid $12.8 billion in 2018 to acquire a 35% stake in Juul that valued the company at about $35 billion. Since then, Altria has written down the value of the stake to $1.6 billion as of March 31.
Jefferies analyst Owen Bennett said the news was a “big negative read” for Altria, coming at a time when U.S. cigarette volumes are under pressure from worsening economic conditions and the shift to reduced-risk products, or RRP.
“Altria’s outlook is becoming more challenged given its close to 50% cigarette share,” Bennett wrote in a note to clients. “At the same time, the FDA is looking to introduce measures (such as a U.S. cigarette menthol ban) to accelerate the shift over to RRP. Altria is in a very tricky spot to this respect as it at least needs to take its fair share in RRP. “
In another blow to Juul, the FDA has cleared the path for its rivals, including Reynolds American Inc. and NJOY Holdings Inc., to keep tobacco-flavored e-cigarettes on the market. The regulator was expected to do the same for Juul. Reynolds American is part of British American Tobacco 0A76, +2.68% BATS, -0.53%, while NJOY is privately held.
Juul did not comment to The Wall Street Journal.
“This now leaves question marks over the likely outcome of the BAT PMTA (premarket tobacco application) for Vuse Alto,” said Jefferies’ Bennett. “You could make a case this is also at risk given the most recent youth tobacco survey showed its underage prevalence greater than Juul’s.”
If the FDA were to also reject British American Tobacco’s application, it would be a “very strange decision,” as it would mean the two biggest brands would be off the market, leaving only one player in the popular pod segment in NJOY.
“If BAT is indeed approved, this would be a big positive as it would then be the largest player by a material distance (NJOY overall market share currently less than 1%),” he wrote.
Juul has been the subject of probes and investigations by a range of agencies and states, while school administrators and families have filed thousands of lawsuits against the company for allegedly targeting teens with its marketing. The company is also being investigated by federal prosecutors and the FDA.
Altria shares have fallen 12% in the year to date, while the S&P 500 SPX, +0.22% has fallen 21%.