U.S. Markets open in 2 hrs 57 mins

How Juul became the FDA’s latest target

Zack Guzman
Senior Writer

It’s hard to believe Juul Labs, the leading e-cigarette maker in the U.S., is only three years old.  

Considering the $15 billion startup has grown to control nearly 73% of the e-cigarette market, it’s easy to see why the U.S. Food and Drug Administration has focused the scope of its regulation efforts largely on the San Francisco-based unicorn.  

Just this week, the FDA announced it conducted an “unannounced on-site inspection” at Juul Labs headquarters in San Francisco after the agency’s commissioner Dr. Scott Gottlieb decried the growing prevalence of e-cigarette use among high schoolers as reaching “epidemic proportions.”

Earlier in September, the FDA ramped up efforts to curtail underage use of e-cigarettes by requiring Juul, as well as British American Tobacco’s Vuse, Altria’s MarkTen, Imperial Brands’ Blu E-cigarettes and Japan Tobacco’s Logic, to share a plan on how they will prevent teenagers from using their products. The FDA gave them 60 days to comply.

Juul Labs accounts for nearly 73% of the entire e-cigarette market, according to Nielsen data cited by Wells Fargo analyst Bonnie Herzog.

Juul said it “will submit a comprehensive proposal to address underage usage within the 60-day timeline,” declining to elaborate.

As we await the proposal, here’s what we know about Juul.

Juul becomes a behemoth

Juul’s rise dates back to 2004, when Stanford University graduate students James Monsees and Adam Bowen were taking a smoke break from brainstorming topics for their joint master’s design thesis. Their shared desire to quit smoking led them to seek a new way to deliver nicotine, which the duo used to found Pax Labs (formerly called Ploom) in 2007.

Nearly 10 years later, the company introduced a new product that quickly upended the e-cigarette market: The Juul. Shaped like a sleek USB drive with a minimalist design, it quickly earned its title as “the iPhone of vaping” by many reviewers. The patented technology behind it boasts the quick hit of nicotine expected from a traditional cigarette, with the ease of use that came with replacing its Juulpod cartridges that pack as much nicotine as a pack of cigarettes. The Juul starter kit, which includes the rechargeable e-cigarette and four Juulpods, retails at a slight premium to its competitors at $49.99.

A Juul e-cigarette uses nicotine-filled removable pods that come in a variety of flavors. Critics says those flavors have helped attract underage users. REUTERS/Ronen Zvulun

Impressively, Monsees revealed in an interview with CNBC the 20-person team that launched Juul in June 2015 was able to do so on a budget of $2 million. Its success within just two years led to Pax Labs spinning Juul Labs off in 2017.

Sales in the 52-week period, ending in November 2017, topped $224 million, representing 32% of the entire e-cigarette category, according to Nielsen sales data cited by Wells Fargo analyst Bonnie Herzog. By April, Juul’s market share doubled to top 60%. As of September, Herzog’s same report showed Juul’s 52-week sales grew 770% over the same period a year ago to top $1.47 billion, representing nearly 73% of the entire category. Juul said the bulk of its sales, roughly 90%, come through retail brick-and-mortar locations.  

That breakneck growth partly led to a $1.25 billion funding round in July, which included  a notable $600 million investment from Tiger Global Management, the hedge fund that backs Spotify, valuing the company at $15 billion, according to The Wall Street Journal.

Targeting minors

But critics claim Juul’s success has put minors at risk. Advocacy group Campaign for Tobacco Free Kids, which sued the FDA in March for delaying e-cigarette regulations, criticized Juul’s early ad campaigns for specifically targeting underage users. Monsees admittedly called the campaign, which did feature one 20-year-old model holding a Juul, “flawed” and the company has since shifted to a campaign highlighting adult smokers who have used the Juul to quit smoking. The company says the average age of its online customers is 31.

Unfortunately, that story is contradicted by data increasingly highlighted by the FDA. After making the announcement that it seized thousands of documents tied to marketing practices in its unannounced visit at Juul’s headquarters, FDA officials noted that e-cigarette use among high schoolers had jumped 75% in just the last 30 days. A separate RAND Corporation study published that same day echoed concerns surrounding underage vaping, revealing that about half of the e-cigarette users in the study, aged 16 to 20, wound up eventually smoking traditional cigarettes after just two years.

Immediately following the FDA first raising issue with underage use of e-cigarettes in April, Juul Labs announced a pledge to dedicate $30 million towards keeping its products out of the hands of minors.

Zack Guzman is a reporter for Yahoo Finance. Follow him on Twitter @zGuz.