The FDA Cracks Down on a Leading E-Cig Maker

The U.S. Food and Drug Administration is sending a very clear message to the electronic cigarette industry: Keep your products out of the hands of minors or we are coming after you.

The regulatory agency launched a sweeping offensive against leading e-cig manufacturer JUUL Labs, and retailers who sell its devices to minors. It issued warnings to 40 retailers, including national chains like 7-Eleven and Cumberland Farms, as part of a monthlong crackdown against illegal sales of the JUUL e-cig to underage users. And in a rare move, it also asked JUUL Labs to turn over documents about the design, marketing, and ingredients found in its product.

The new digital face of vaping

Unlike other electronic cigarettes, which resemble actual cigarettes or large, flute-like vaping devices, the JUUL e-cig is a sleek device that more closely resembles a thumb drive. That apparently has made it easier for teens to bring the devices to school and is making them more difficult to detect.

The FDA admits it doesn't understand why kids prefer JUUL's e-cigs to others; in a letter to the device maker requesting documentation, the regulatory agency speculated, "JUUL products may have features that make them more appealing to kids and easier to use, thus causing increased initiation and/or use among youth." It wants to learn right away what the appeal is and nip it in the bud.

JUUL Labs is cooperating with the regulatory agency and announced a $30 million campaign against improper and illegal use of its products, as well as support for raising the legal age to buy tobacco products to 21. But it also reiterated that its devices are intended to help smokers wean themselves off traditional cigarettes, and are not intended for nonsmokers or for kids. In a statement JUUL Labs said, "We cannot be more emphatic on this point: No young person or non-nicotine user should ever try JUUL."

A different kind of electronic cigarette

The JUUL electronic cigarette has come virtually out of nowhere to displace Reynolds American's Vuse e-cig as the top-selling device on the market, commanding a nearly 55% share. The device from Reynolds American, a subsidiary of British American Tobacco (NYSE: BTI), has a shrinking 19% share.

The JUUL device uses a completely different technology than traditional e-cigs, or even the heat-not-burn technology being popularized by Philip Morris International (NYSE: PM) with its iQOS device. Although (like many e-cigs) the JUUL uses e-liquids in its pods, the type of nicotine JUUL's liquids contain is different: naturally occurring nicotine salts that are attached to other organic compounds, rather than so-called "freebase" nicotine, which isn't bonded to other compounds.

JUUL Labs uses a proprietary formulation that was patented by Pax Labs (from which JUUL was spun out from last year), which reportedly delivers a nicotine hit virtually identical to that of combustible cigarettes. And because JUUL Labs uses benzoic acid, it reportedly provides an incredibly smooth taste that allows the use of higher nicotine levels in the e-liquid.

That could be a big problem for the device maker because the FDA seems particularly concerned over the use of nicotine in these products, noting that some users may not even realize they're ingesting nicotine when they vape.

Challenging market forces

The crackdown comes at an awkward time for other e-cig manufacturers. Philip Morris is trying to gain FDA regulatory approval to market its iQOS device in the U.S., possibly with a reduced-risk label. It needs to break into more markets with the device because its earnings report showed its biggest and best market, Japan, had seemingly already plateaued.

The U.S. is the largest market for electronic cigarettes, followed by the U.K. and China, and forecasters estimate that the global reach of e-cigs will hit $48 billion by 2023. Gaining approval to sell the iQOS device here would help Philip Morris regain momentum, but there have been continuing concerns that e-cigs induce kids to end up smoking. A crackdown on e-cigs because retailers are selling them to minors doesn't help Philip Morris' case or that of the industry.

While the primary focus has been on JUUL Labs and its particular electronic cigarette, all e-cig manufacturers have been put on notice that preventing kids from getting their hands on the devices is a top priority of the agency. Although the FDA reiterated it sees e-cigs as an avenue for weaning people off traditional cigarettes, a more concerted effort to combat underage use may be required if the industry wants to avoid an even greater regulatory backlash.

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