Philip Morris Ends Merger Talks With Altria as Juul Woes Mount

The constant drumbeat of bad news surrounding Juul Labs' electronic cigarettes and the rising incidence of health issues related to vaping have convinced Philip Morris International (NYSE: PM) to shelve its idea of merging with Altria (NYSE: MO).

What had once looked like a smart pair-up to rejoin the international cigarette giant with its former domestic parent has now crumbled under the weight of doubts about where the regulatory fist would fall. Altria owns a 35% stake in Juul Labs, the leading e-cig maker by far and the primary scapegoat for industry criticism because it is the face of the vaping market.

After careful consideration, Philip Morris CEO Andre Calantzopoulos said in a statement that it and Altria "have agreed to focus on launching IQOS in the U.S. as part of their mutual interest to achieve a smoke-free future." All that other stuff they were discussing could be forgotten.

Man breaking a cigarette.

Image source: Getty Images.

Smells like teen spirit

Considering the cloud the entire electronic cigarette industry is currently operating under, it's not surprising Philip Morris wanted to keep its distance. After all, the IQOS has already received marketing approval from the Food and Drug Administration, including two menthol flavors, so the company doesn't need any added attention on its product that might cause the agency to revisit its decision. That's also why Philip Morris went out of its way to say the IQOS is not a vapor product and teens don't like it.

The FDA is on a crusade to stop teen e-cig use, calling it an "epidemic" and cracking down in the harshest terms possible short of banning the devices altogether, which it has also threatened to do. It is preparing to eliminate all e-cig flavors from the market except tobacco, and states are starting to implement similar bans on their own. Some cities have already banned vaping.

Philip Morris just doesn't need the headache -- or the guilt by association -- that would come from merging with Altria. 

An industry pariah

Juul has received special condemnation from the FDA, which critiqued the company's antivaping campaign for teens as a veiled effort to actually lure more kids to use the device.

The vehemence of the response from regulators seems to support FDA commissioner Scott Gottlieb's opinion that he doubts Juul will ever make it through the regulatory process for marketing approval. Some now fear it may have doomed the entire industry.

While the FDA's European counterparts are not so reactionary and actually welcome electronic cigarettes as a tool to help reduce cigarette smoking, some countries are rethinking their position. India, for example, just banned all e-cigs, a move that also poses a threat to Philip Morris' intention to expand in the country, which is one of the largest cigarette markets in the world behind the U.S. and China.

A new world order

The agreement with Altria to market the IQOS came well before the current controversy -- or even before Juul was on the market. The two tobacco giants had agreed years ago to partner on reduced-risk products, and the device has been marketed under Altria's Marlboro brand around the world. Altria is now selling it in the U.S. as Marlboro HeatSticks and is starting small with a pilot in Atlanta before rolling it out nationally.

The IQOS may not have the same problem with teens that Juul does because it uses real tobacco that is heated to the point of creating a vapor. While that is helpful to adults trying to quit smoking because it closely mimics the experience of cigarettes, it may be too similar for kids to want to start using it. Philip Morris says it has four years of sales data to back up the claim.

The closer ties the IQOS had created between Philip Morris and Altria had raised the thought of possibly merging them again. A united company with two leading products would be a formidable competitor and would keep all the profits in one place.

But it's clear that a reunion is no longer happening, and as Philip Morris International intoned, their "mutual interest to achieve a smoke-free future" will only occur as two independent companies.

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