US vaping crisis helped tank merger talks with Altria, Philip Morris lnternational’s CFO says

The U.S. vaping crisis helped tank merger talks between Philip Morris International and Altria, a top PMI executive said Thursday.

PMI and Altria confirmed they were in merger talks in late August before calling off a potential deal in September. King told analysts on a call discussing the company’s third-quarter earnings the discussions were “a natural outgrowth” of Altria and PMI’s work together launching Iqos, PMI’s heated tobacco device, in the U.S.

Those talks broke down amid heightened scrutiny of e-cigarettes in the U.S., panic over a vaping-related lung disease and an epidemic of teen vaping prompted lawmakers and regulators to pursue restrictions on the industry, including an impending policy the Trump administration that would remove all flavored e-cigarettes from the market.

“One big thing was the environment was developing rather rapidly as we were in these discussions with all the news around e-vapor and the regulatory approach from FDA,” PMI Chief Financial Officer Martin King said on the call.

PMI shareholders pushed back on the combination, saying if they wanted exposure to the U.S. they could invest in Altria, King said. The two companies were one until Altria spun off its international business in 2008, creating PMI.

Juul, the e-cigarette giant Altria invested $12.8 billion in December, was not “the driver” that stated or ended the merger talks, King told CNBC in an interview following the earnings call. Juul, which declined to comment, dominates the U.S. e-cigarette company but is the subject of numerous lawsuits and investigations.

“It was the overall total picture, which included the environment, the news flow coming out of the e-cigarette situation overall out of the U.S., not just specific to Juul,” King told CNBC. “Obviously shareholder feedback is part of the totality of evidence approach, hence the decision to go down the known path, the very big opportunity we saw together with Altria with regard to Iqos.”

PMI and Altria will continue working together to launch Iqos in the U.S. Altria introduced Iqos in Atlanta earlier this month after the Food and Drug Administration cleared the product this spring. PMI already sells Iqos in 48 markets overseas.

At the end of the third quarter, PMI boasted 12.4 million Iqos users, 8.8 million of whom stopped smoking cigarettes and switched to Iqos altogether, King said Thursday. The Atlanta launch comes amid uncertainty in the e-cigarette market over a surge in teen vaping coupled with panic over a vaping-related lung disease that has sickened nearly 1,300 people and killed at least 26, according to the latest figures from the Centers for Disease Control and Prevention.

All e-cigarettes currently on the market will need to file applications to the FDA in May. The FDA will review the products’ safety and effect on public health before deciding whether the products can stay on the market. Iqos already went through this review process.

“We chose the path to focus on the big opportunity we have with Iqos, so let’s go down that road,” King said. “It’s right in front of us and we see that opportunity being even bigger than before the discussions.”

An Altria spokesman in an email said the company is “excited” about its “strong partnership with PMI and being able to introduce IQOS to adult smokers in the U.S.”