E-cigarette maker Juul, which has vowed to make cigarettes obsolete, is near to inking a deal to become business partners with Altria, one of the world’s largest tobacco companies.
The union — which would create an alliance between one of public health’s greatest villains and the start-up that would upend it — entails cigarette giant Altria investing $ 12.8 billion for a 35 percent stake in Juul, at a $ 38 billion valuation, according to two people briefed on the negotiations.
The boards of the two companies each plan to meet this afternoon to consider the deal, according to one of the people.
The deal would give Juul access to Altria’s prized shelf-space in convenience stores and its marketing prowess, and the possibility of putting a mention of its products and coupons into Marlboro cigarette packages.
Juul is under intense scrutiny from public health officials and the Food and Drug Administration for an explosion in the number of teenagers vaping with its sleek products following a youth-oriented marketing campaign. The San Francisco-based company has contended that teenage use was an unintended byproduct of its efforts to create an alternative to cigarettes.
Juul officials have said that they remain committed to their core values and had initially turned away the deal, whose details were first reported in The Wall Street Journal. But company officials became convinced when Altria agreed to several major concessions, including allowing Juul to have some access to Altria’s customer data.
Juul contends that the most important thing it can do for public health is to get its product into the hands of smokers so they can experience a satisfying alternative. Once that happens, Juul believes, people will switch to vaping.
Vaping e-cigarettes is widely considered less harmful than smoking traditional cigarettes. Smoking rates have fallen sharply in recent years, particularly owing to intensive public health campaigns and regulations, and companies like Altria have looked for other business to provide new profit centers.
Public health authorities said the deal between the two companies would undercut Juul’s ability to play the cigarette spoiler and show that that start-up’s own fealty is to profit, not public health.
“This shows that Juul is all about maximizing sales and profit,” said Eric N. Lindblom, director for tobacco control and food and drug law at the O’Neill Institute for National and Global Health Law at Georgetown University. “You don’t team up with a company that has an incredible vested interest in customers’ smoking and in maintaining that market share as long as they can.”
Public health officials also say they worry that Altria could use its investment to learn how Juul operates and to strengthen the startup’s growing lobbying efforts: Altria, itself still a potent lobbying force in Washington, could also dampen the role Juul might have played in pushing for regulatory measures to promote e-cigarettes over their deadlier combustible cousins.
Dr. Scott Gottlieb, the commissioner of the Food and Drug Administration, has floated a proposal to reduce the nicotine levels in cigarettes to make e-cigarettes a more compelling alternative to smokers.
But Altria has been involved in a plan to discourage Dr. Gottlieb’s nicotine-cutting proposal. Publicly, Altria says it supports an eventual reduction in nicotine levels, but it has quietly engineered a campaign to kill the effort by having thousands of form letters sent to the F.D.A. in protest.
“If you combine the resources of Juul and Altria, together you create one of the wealthiest, most powerful corporations we have seen – one whose interests are directly linked to preventing or delaying legislative or regulatory action which discourages use of their products,” said Matthew Myers, president of the Campaign for Tobacco-Free Kids.
“Juul’s behavior has already called into question its credibility as a company that cares about the health of the public,” he said, adding that the deal would “dramatically alter the perception that this was a company whose goal was to reduce, if not eliminate, the use of cigarettes.
In an effort to staunch the soaring rates of vaping among teenagers, the F.D.A. has been cracking down on Juul and other companies, demanding that they not sell most flavored products in retail outlets where they could be accessible to youths.
Previously, Altria purchased United States Tobacco, which sold a competing chewing tobacco product that some research suggests is less harmful than combustible smoking. David Sweanor, chairman of the advisory board at the Centre for Health Law, Policy & Ethics at the University of Ottawa, said Altria tried to dampen UST’s role as an alternative to cigarettes and he feared Altria could try to do the same with Juul.
That said, Mr. Sweanor said he found Altria’s investment dumbfounding. “It’s an incredibly high valuation on a company that if it’s successful is a big threat to the whole cigarette business,” he said. “If it isn’t, they’re paying an awful lot of money for it.” There is, he argued, a silver lining to the purchase price: it could encourage other entrepreneurs to develop e-cigarettes because there is clearly money to be made.
“It sends a message to everyone who wants to be a billionaire that they could try to replace the cigarette market.”
Altria is also still waiting for the F.D.A.’s decision on IQOS, an electronic nicotine delivery device that heats but does not burn tobacco. Although the product is made by the Philip Morris International, Altria is intended to be the distributor in the United States.