By Siddharth Cavale and Nivedita Balu
(Reuters) - The chief executive of e-cigarette maker Juul stepped down on Wednesday as merger talks between its biggest investor Altria and Philip Morris collapsed in the face of a regulatory backlash against vaping that could reshape the industry.
Juul Labs, in which tobacco giant Altria Group (N:MO) owns a 35% stake, is facing intense scrutiny in its home market as teen use of e-cigarettes surges. The company, which faces a U.S. ban on some products, said on Wednesday that it would suspend all advertising in the country.
Marlboro makers Philip Morris International (N:PM) and Altria, announcing the end of their $187 billion merger talks, said they would instead focus on the joint launch of tobacco-heating product iQOS in the United States.
"It appears to us the talks fell apart over Juul," Wells Fargo (NYSE:WFC) analyst Bonnie Herzog wrote in a note, adding she was not surprised, given the litany of negative health headlines. Philip Morris and Altria did not mention the e-cigarette firm, however.
Vaping devices such as Juul's, which vaporize liquid containing nicotine, have borne the brunt of the regulatory crackdown globally.
The iQOS, which heats but does not burn tobacco, is a rival non-smoking technology and, crucially, has been authorized by the U.S. Food and Drug Administration (FDA).
When the talks were announced last month, the potential for Juul and iQOS to dominate the biggest vaping markets globally was seen as central to the logic of a deal. It would have seen the tobacco companies reunite a decade after their split and created an industry heavyweight with a combined market value of $187 billion, triple its closest rival British American Tobacco (L:BATS).
However, some investors were skeptical of the synergies the deal would generate and a steady rise in number of vaping-related deaths and illnesses reported in the United States may also have changed the companies' thinking.
"After much deliberation, the companies have agreed to focus on launching iQOS in the U.S. as part of their mutual interest to achieve a smoke-free future," Philip Morris CEO André Calantzopoulos said.
SURGE IN YOUNG VAPERS
The Trump administration in the United States has announced plans to remove all flavored e-cigarettes from store shelves due to the rising appeal among teenagers.
The share of high school students using e-cigarettes has more than doubled over the past two years, with 27.5% reporting they had tried an e-cigarette in the past month, according to preliminary federal data released this month.
U.S. health officials are also investigating an outbreak of hundreds of severe lung illnesses and nine deaths linked to vaping.
In its announcements on Wednesday, Juul also said it would not lobby the administration over the proposed ban on flavored products.
The FDA earlier this month warned the company about marketing its products as safer than traditional cigarettes and requested more documents and information within 30 days.
Federal prosecutors in California are conducting a criminal probe into e-cigarette maker Juul, the Wall Street Journal reported on Tuesday, though the focus of the probe was unclear.
Elsewhere in the world, South Korea and India last week became the latest countries after Brazil and Thailand to ban or warn about the sale of e-cigarettes, dealing further blows to the still-young industry.
Factbox on global backlash:
'FULL-FORCE' IQOS LAUNCH
Stifel analyst Chrisopher Growe said Altria, which holds the license to sell iQOS in the United States, would embark on a "full-force" effort to launch the product, taking advantage of being the only tobacco-heating product approved for sale.
The company is expected to launch the product in Atlanta "imminently" and then quickly broaden distribution, he said. Philip Morris will sell iQOS in all other markets.
San Francisco-based Juul said it was replacing CEO Burns with K.C. Crosthwaite, a longtime Philip Morris USA veteran and most recently the chief strategy and growth officer of Altria, a sign of Altria's growing influence over Juul after its $12.8 billion investment in the e-cigarette maker last December.
Burns, a former private equity executive who came to Juul in late 2017 from yogurt maker Chobani, presided over meteoric growth at the company, as it morphed from a 300-person startup to an international operation employing thousands.
His tenure also coincided with the sharp rise in teenage e-cigarette use and a regulatory crackdown on the industry,.
Altria has many more years of experience than Juul dealing with regulators such as the FDA.
Shares in Philip Morris were up 5.7%, while Altria was down 2.5% in afternoon trading.
Rivals British American Tobacco and Imperial Brands (L:IMB) rose 3.2% and 2.2% respectively on Wednesday's announcements.