September 18, 2019 / 8:49 PM / a month ago

Breakingviews - Vaping isn’t dead, just prematurely haggard

A man poses for a picture, as he vapes at home in Ciudad Juarez, Mexico January 28, 2019. REUTERS/Jose Luis Gonzalez

NEW YORK (Reuters Breakingviews) - Juul Labs has discovered the fountain of premature aging. The e-cigarettes it sells were intended as a safer alternative to smoking, but now lawmakers are treating them like a menace. Growth markets, such as China and India, are receding from view and Juul’s $38 billion valuation from last year has probably gone up in smoke. However, all of this doesn’t mean that vaping is dead, or that e-cigarettes won’t be profitable.

Converting smokers to vaping is still a public health win. Tobacco kills nearly half a million Americans a year, and e-cigarettes have far fewer of the toxic compounds that burning tobacco produces. The problem is young customers taking up the habit. The percentage of high schoolers using e-cigarettes rocketed from 11.7% in 2017 to over 20% in 2018, says the surgeon general. Six deaths and several hundred mysterious cases of lung illnesses linked to vaping also change the health – and financial – calculus.

Juul’s valuation is now leaking black smoke. San Francisco and India are among the places that have blocked the sale of e-cigarettes, and the company’s products disappeared from Chinese e-commerce websites days after being launched last week. That can’t please Marlboro-maker Altria, which paid $12.8 billion for a 35% stake in Juul last year. That valuation of about 60 times EBITDA, estimated by Bernstein, is six times Altria’s own according to Refinitiv data. Altria investors have lost 14% of their money since it struck its deal with Juul in December. British American Tobacco is up by that much, and then some.

Yet all is not lost for Juul and its part-owner. True, regulation is likely to focus on taxation, since a 10% increase in cigarette prices cuts consumption by 3% to 5% according to a review of studies by the International Agency for Research on Cancer, with the biggest reductions among young users. That would help return vaping to its origins as a product for smokers looking to kick the habit, with slower growth, but also higher barriers to entry. An awareness of the risks in e-cigarettes should also draw smokers towards recognized brands. Juul may still be the best in its market; it just won’t be the market Altria originally hoped for.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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