UPDATE: On Wednesday, September 11, the Trump Administration and the Food and Drug Administration announced plans to remove all flavored non-tobacco-flavored e-cigarettes from the market. Flavored products have been closely linked to teen use of e-cigarettes, and a growing nicotine addiction problem among teens. Read more about the epidemic below.
Leading e-cigarette maker Juul Labs has found itself in hot water with the Food and Drug Administration (FDA) over the way it markets products to customers.
On Monday, September 9, the FDA sent Juul a warning letter, saying it may have violated the law by advertising its products as a safer alternative to cigarettes, without approval from the FDA. The FDA said it was particularly concerned about the way the company has marketed its products to students, claiming its e-cigarettes are 99% safer than traditional cigarettes. It has given Juul three weeks to respond.
Vaping side effects
The FDA’s letter casts further doubts on Juul at a time when deaths and mysterious lung ailments related to vaping are on the rise. About 450 people have suffered from a pneumonia-like illness developed after vaping, and five people have died, according to reports. (The FDA oversees the safety and efficacy of a wide range of drugs and medical services, as well as the safety of the nation’s food supply, among other things.)
Nicotine epidemic among teens
E-cigarette use increased nearly 80% among high school students in 2018, with more than 3.6 million youths, and one in five high school students vaping, according to an advisory from the nation’s surgeon general and the Centers for Disease Control and Prevention.
The nicotine content of one vaping pod is equivalent to 20 regular cigarettes, according to the advisory.
Juul, a private company that manufactures a sleek USB-shaped device, controls nearly 70% of the e-cigarette market, the largest share of any company in this space. Juul’s sales grew 800% between 2017 and 2018.
The global e-cigarette market is expected to increase to more than $86 billion by 2025 from about $14 billion in 2017, according to industry analysts. Meanwhile, the total number of adult smokers in the U.S. decreased to 15.5% in 2016, or around 38 million people, from 20.9% in 2005, according to the Centers for Disease Control.
A changing market
Traditional tobacco companies are also eyeing the e-cigarette market at a time when fewer consumers are reportedly smoking.
Virginia-based Altria Group, one of the world’s largest tobacco companies, invested $12.8 billion in Juul in 2018, equivalent to a 35% stake. Phillip Morris (PM) has invested in a heated tobacco product called IQOS.
PM and Altria are also considering merging. Phillip Morris was previously a division of Altria, but Altria spun it off into an independent business in 2008. The combined company would become a $200 billion giant in the industry.
Why company ethics matter
False advertising, illness, or even the loss of life, related to faulty products can have enormous consequences for companies, including federal investigations and lawsuits.
For example, Investigators continue to look into aircraft manufacturer Boeing, whose 737 MAX jetliner crashed twice due to a software flaw killing more than 300 people in late 2018 and early 2019. The 737 MAX, which was once Boeing’s most popular plane, is grounded around the world while the investigation continues.
Similarly, consumer products and drug manufacturer Johnson & Johnson was recently ordered to pay $572 million for promoting highly addictive drugs that contributed to the opioid epidemic in the U.S.
The big lesson is that it’s probably a best practice for public companies to behave ethically, and they are vulnerable to news of investigations or other federal actions when they do not. Not only their stocks, but ultimately the value of the companies themselves, are determined by how responsible companies are to their customers and shareholders.
Further, the ethical values and actions of companies are something that investors might consider before making an investment.
Learn about how to research company stocks.