Altria Group Inc. has paved the way to re-enter the e-cigarette market after choosing to permanently end its non-competition agreement with Juul Labs Inc.
Altria said in a regulatory filing on Friday that it terminated the non-compete agreement with the controversial e-cigarette maker on Thursday.
Altria spokesman Steve Callahan said in a separate statement that “our decision to end our non-competition maximizes our flexibility to compete in e-steam.”
“It allows us to maintain our economic interest in Juul, to be competitive organically and through mergers and acquisitions.”
Callahan said he had no further details on how and when Altria would re-enter the e-cigarette market.
Juul could not immediately be reached to comment on the impact of dissolving the non-compete agreement on its future business.
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While the move was expected by analysts, it is still notable given that Altria made a $12.8 billion investment in Juul Labs in December 2018, giving it a 35% stake.
As part of the investment, Altria halted production of its NuMark e-cigarette, which had struggled to gain traction with vapers. Altria has agreed not to develop and market its own e-cigarette products for up to six years as long as Altria provides services to Juul Labs.
In January 2020, Altria reduced its investment value to $4.2 billion as of December 31, 2019.
On July 28, Altria revealed that it had written down its investment in Juul Labs to an estimated fair value of just $450 million. At $450 million, the value of the investment represents just 3.5% of Altria’s initial outlay.
The Altria-Juul Labs agreement allowed Altria to be released from the non-compete agreement if the value of the investment fell below 10% of the value of the initial investment, or at least 1 .28 billion dollars.
Altria said the exit from the non-compete agreement also includes: “the loss of our nomination rights to Juul’s board of directors (other than the right to appoint an independent director as long as our ownership continues to be by at least 10%); our pre-emption rights, consent rights and certain other rights with respect to our investment in Juul; and the conversion of our Juul shares into single voting common stock, significantly reducing our voting power.”
In explaining its July 28 decision, Altria raised the possibility of Juul Labs entering bankruptcy protection if Juul cannot “maintain sufficient liquidity to fund anticipated cash requirements.”
Unsurprisingly, Altria cited the Food and Drug Administration’s June 23 decision to ban Juul products at retail.
Altria made the decision to write down the investment value even though a federal judge on June 24 issued a temporary stay of the FDA’s marketing denial order.
On July 6, the FDA agreed to temporarily suspend the order, allowing Juul to continue selling its e-cigarettes and related products.
“The agency has determined that there are scientific issues unique to the Juul app that warrant further review,” the FDA tweeted on July 6. “This administrative stay temporarily suspends the marketing refusal order pending the additional review, but does not revoke it.”
The FDA did not say how long the additional scientific review would take.
On Sept. 20, Juul Labs filed — as expected — a federal lawsuit against the FDA in its bid to keep its e-cigarette products available on retail shelves.
In the complaint, Juul asks the FDA to respond to two Freedom of Information Act requests regarding the scientific disciplinary reviews underlying its regulatory decision.
When Altria acquired its 35% stake in December 2018, Juul held a dominant US market share of over 70%.
However, the shadow of a potential ban on Juul Labs e-cigarette products from US retail shelves has accelerated market share gains for RJ Reynolds Vapor Co.’s Vuse brand.
The market share gap between Vuse and Juul has widened to a double-digit lead for Vuse in the latest Nielsen analysis of convenience store data. The analysis covers the four-week period ending September 10.
Vuse’s market share fell to 39.7% from 39% in the previous report, compared to Juul’s decline of 29.4% to 28.1%. Vuse also edged out Juul in the year-over-year comparison at 32.9% and 32.7%, respectively.
Altria recorded a pretax loss of $1.2 billion in the second quarter “due to a decrease in the estimated fair value of our investment in Juul.”
Altria cited for its reasoning “a decreased likelihood of a favorable FDA outcome for Juul’s products that are currently marketed in the United States” as well as a “decreased likelihood that Juul will maintain adequate liquidity for fund projected cash requirements, which could result in Juul seeking protection under bankruptcy or other insolvency law.
Barclays analyst Jain Gaurav said on July 28 that it had an “underweight” rating on Altria, in part because it has “almost no next-generation product presence” on the market. American market.
“We believe Altria is a melting ice cube and its exposure to next-gen products is very low relative to its peers, and therefore deserves a lower multiple in our view,” Gaurav said.
Cowen & Co. analyst Vivian Azer said in July that despite Juul’s drastic writedown in investment value, “steam mergers and acquisitions are not out of the question, although potential candidates who have received pre-market tobacco application approval are few”.
“In heated tobacco products, Altria still expects to finalize the design of an internally developed product by the end of the year, although the timing of commercialization is uncertain given the need for a pre-market tobacco application.