A Juul Labs sign behind packages of device kits and pods at a shop in San Francisco, California, the US. Picture: BLOOMBERG / DAVID PAUL MORRIS
A Juul Labs sign behind packages of device kits and pods at a shop in San Francisco, California, the US. Picture: BLOOMBERG / DAVID PAUL MORRIS

New York — Altria, the US maker of Marlboro cigarettes, reported a $4.5bn charge related to its investment in Juul Labs as the nascent vaping market faces a reckoning.

The company said the non-cash charge isn’t tied to a single event. Instead, it cited a slew of challenges: a high chance the US Food and Drug Administration will remove flavoured e-vapour products from the market, various bans already put in place by some cities and states and other factors. The shares rose 1.2% in New York trading.

“The market may be relieved a bit that the Juul impairment charge was not higher,” Bloomberg Intelligence Analyst Ken Shea said, noting the possibility that Juul’s business prospects might not be as damaged from current events as many had thought.

Investors had been bracing for a write-down, and Fidelity Investments recently slashed the value of its own stake in the e-cigarette maker by almost 50%. In fact, shareholders may have been heartened to see Altria take its medicine now, rather than wait until May, when the FDA is expected to decide whether to authorise various e-cigarette products.

Altria’s 35% stake in Juul, which it paid $12.8bn for late 2018, has turned into a headache as the e-cigarette market grapples with a rash of vaping-related lung illnesses and deaths. Altria has also been named in lawsuits claiming youth addiction to Juul. These are new kinds of challenges for an old-guard company like Altria that’s used to taking things slow, getting FDA approval and testing the market before making big decisions.

“We did not anticipate this dramatic a change in the e-vapour category,” Howard Willard, Altria’s chair and CEO, said on a conference call. “The lung injury was something we hadn’t predicted.”

Nevertheless, the CEO sees the setbacks only pushing out by a year or two Juul’s ability to achieve the kinds of US margins Altria had expected. The company will eventually be “a contributor to our equity income line going forward,” Willard said.

The stock had fallen 6.9% in 2019 to the close on Wednesday, weighed down by increased regulatory action in the market for e-cigarettes.

The vaping scare may be a double-edged sword, since the outbreak of illnesses could push some consumers back to regular cigarettes. Willard said Altria's “core tobacco businesses delivered excellent third-quarter financial results” — even as its total cigarette shipments fell 6.6% in the quarter.

Altria reaffirmed its 2019 guidance based on the tobacco business. The forecast includes “little to no” contribution from its Cronos cannabis or Juul investments.

Meanwhile, Altria is moving forward with IQOS, a heat-not-burn device for tobacco developed by sister company Philip Morris International that arrived in the US very recently. Altria, which has started testing it in Atlanta, said on Thursday it would expand into Richmond, Virginia, and that it planned to increase investments related to the device.

It is too soon to give a timeline for when IQOS will be profitable, and Altria said it was paying the cost for promotional pricing right now on the introduction of the product. Once the company learns from the Atlanta launch, it will ramp up national sales more quickly.

Bloomberg