Juul, the popular e-cig startup under growing FDA scrutiny, says removing flavors is ‘on the table’ among other things

Juul has been on an incredible, and in some ways, nightmarish, ride this year. The three-year-old, San Francisco-based company has handily won 75 percent of the e-cigarette market in the U.S., thanks in large part to the sleek design of its nicotine vaporizer. It is reportedly on track to see at least $1 billion in revenue this year. And the company has capital to invest in its business, having sealed up a $1.2 billion round that it began raising in summer. Much of that money will be spent internationally, and no wonder — roughly 95 percent of the world’s billion smokers live outside of the U.S.

Against the backdrop of this supercharged growth, dark clouds have gathered around the company as parents and regulators have grown concerned by its adoption by teenagers, many of whom might never consider smoking a cigarette but are taking up nicotine vaping and “Juuling” specifically. In fact, FDA Commissioner Scott Gottlieb told an audience in New York yesterday that his agency is releasing data in November that will show year-over-year use among high schoolers has risen by at least 80 percent and that middle-school usage has grown, too. Gottlieb further warned that the agency might also eventually ban the sale of e-cigarettes online out of concern that they are being bought in bulk and acquired by minors.

Last night, at an industry event hosted in San Francisco by this editor, I sat down with Juul’s founders, Adam Bowen and James Monsees, who met while at Stanford and have teamed up to develop numerous vaporizer products over the years, including the popular Pax cannabis vaporizer and, more recently, Juul, where they are currently CTO and chief product officer, respectively. Over the course of 30 minutes, we talked about the future of the company (they have secured more than 100 patents between them and have applied for many more), whether they would consider an acquisition offer from a tobacco company (the answer seemed to be yes), and why they don’t drop the most controversial feature of the Juul product: its variety of flavored e-cigarette liquids, which critics argue are attracting children but that Juul has long insisted is imperative to getting its target customer — adult smokers — to switch to Juul.

We’ll have video of our conversation available at a later date. In the meantime, here are outtakes from our conversation, edited lightly for length.

TC: You see Juul as a technology company focused on harm reduction. But your product has been adopted by high school students in part, which has parents pissed and regulators worried and created a firestorm. How are you dealing with all of this on a personal level?

JM: Man, this is quite an experience, one that we never really knew if it was going to come to fruition or not, though I think we always expected that if this was going to work, it was going to be really hard. As smokers ourselves, we were really passionate about ending the combustible cigarette once and for all. There are a billion smokers globally, and the U.S. has 38 million smokers. We don’t see them as much here in the Valley. But I’m from St. Louis, and when I grew up, I was exposed to cigarettes, and I think the story was somewhat the same for Adam. Half of long-term smokers will die of smoking-related diseases if we don’t do something about this. Unfortunately, along with that comes a lot of challenges . . . I think what we really didn’t expect was the unfortunate level of adoption by underage consumers, and that is definitely something that we now take on as our mantle to own.

TC: Before we get into this issue and the surrounding controversies, I hoped to pull back the curtain on your company, which is fascinating from a business perspective. How many employees do you have, and are they mostly in San Francisco?

JM: We’re changing very rapidly. At the beginning of this year, we had about 225 employees and today we have about 1,100.

AB: Our biggest offices are in San Francisco, with offices in multiple cities in multiple countries, including in Israel. We just launched in Canada recently. And we’ll be launching several more [offices] this year.

TC: Didn’t Israel ban Juul?

AB: No. Israel imposed a restriction on the nicotine strength allowable for e-cigarettes, so that includes the 5 percent version of our product, which we currently sell in the U.S., but we have since switched to a reduced strength that is compliant with the now-effective limit [there].

TC: 1,100 is a lot of employees. What do they do?

JM: This is an incredibly complicated company, perhaps the most we’ve ever seen and perhaps the most that most of our investors have ever seen. I’m sure there are people in this room who either invest in or have started hardware companies, and [who know that] hardware is just hard.

We are a hardware company. We’re a hardware company that makes and sells millions of products a week. We’re a hardware company that has produced those products at incredibly high volume, all five of them, all of which we manufacture on equipment and tools that we built from scratch. We have to work with contract manufacturers and vendors that are selling us parts in the tens or hundreds of millions on a weekly or monthly basis. We have to do that in multiple countries around the world. We have to comply with regulatory guidelines in many, many different countries. We have to market our products as carefully and effectively as possible. We have to communicate publicly in as grown-up and responsible a fashion as possible.

I could keep going, but the point is we have an incredible diversity of employees. There’s just an amazing amount of cross-functional work that happens at the company.

TC: A story came out in Inc. today where an unnamed employee said the morale is actually very high, that employees really do believe that you never marketed to minors and that they believe you’ll find a way to stem adoption by underage people. They also said they were “making money hand over fist.” What do you think of those comments?

AB: I think morale is very high. People are energized and galvanized to continue working on this cause, which is providing smokers with a satisfying alternative and address the challenges that we face head on. People are really energized to address the issues like youth usage. So that is an accurate reflection of the vibe at the office right now.

TC: You already have more than 100 patents to your names. Does Juul become a holding company for much more than what is on the market currently? What’s next?

JM: The technologies that we’ve been building are incredibly powerful and could be deployed in other markets, there’s no doubt about that. Some of our patent filings cover some bases outside of the core areas that we’re really focused on right now, which is the elimination of smoking from the face of the earth. But the mission of this company is exactly that, to eliminate smoking. The reason that it is the mission is that smoking is the leading cause of preventable death in the world. And we’re very interested in that, I think, conceptually, intellectually, and it’s just kind of a fun mission to work on.

TC: You’ve already raised $1.2 billion, including from Tiger Global and Fidelity. Where do you go for future funding, given that VCs have vice clauses that preclude them from backing the company? Would you consider an IPO?

AB: Sure. Listing the company is certainly a possibility [as is] continuing to grow it privately. These are tactics that we can employ. But really, we’re just focused on growth, both domestically and abroad. So that’s the primary use of the proceeds from the most recent round raised. I mean, we have a ways to go just here in the U.S. We’re 75 percent of the e-cigarette market, which sounds like a lot, but we’re only 4 to 5 percent of the U.S. cigarette market. And that’s what we’re really out to displace. So we’re really just getting started here, and we’ve just scratched the surface outside of the U.S., where 95 percent of smokers live.

TC: And where you’re not dealing with the same regulatory issues as here, although I wonder if it’s going to be sort of a contagion, where people in other countries worry about their teenagers based on what they’re reading in the U.S. In fact, you’re reportedly embroiled right now in three lawsuits, including by a family who says their kid is addicted to your products. You didn’t market [to underage users], as far as you’re concerned. Do you feel at all culpable?

JM: Any under-age use of this product or any nicotine product is strictly unacceptable. And that is the challenge that we are more than happy to take on, and we’re excited to take on. Frankly, I think this has been way too longstanding of an issue in the market.

And things are changing. We’re moving away from a stick that you light on fire and beginning to have the ability to apply technology solutions to a massive problem that has existed for a really long time.

TC: At TechCrunch’s Disrupt event a couple of weeks ago, you talked about connecting Juuls to people’s phones, so that if someone were to leave their Juul behind but had their phone with them, someone else, a minor, couldn’t pick up that Juul and use it. But that seemed like a very unlikely scenario to me.

JM: That’s one of many examples of technologies we can use to deploy to reduce or eliminate these problems. We’ve been using that as sort of an illustrative example of many things because, look, we’re in the midst of conversations with the FDA. We believe very strongly that some of these technology solutions will be huge steps ahead of how this industry has been able to tackle these challenges in the past. But I don’t think at this moment, we’re ready to really talk about specific things.

TC: I don’t know if Juul has suggested it, or it’s merely been suggested that Juul do this, but what about creating geofences around schools so that kids can’t vape there? That seems like a no-brainer.

JM: Yeah, there was there was an article that speculated about this. That is one of many, many patents that have been filed publicly, and if you dig even further, you’ll see a whole bunch of exploration that we’ve done because we’ve been working on this issue for a long time. Unfortunately, the U.S. is unlikely at this moment to be the ground zero for the deployment of some of these youth prevention technologies because there’s a moratorium on new product introductions, but obviously that’s changing very rapidly, so if the opportunity for potentially the U.S. to move even more quickly [arises] . . . that would be tremendous.

TC: Do you feel like the FDA has been fair to you? It seems like you’ve been telling your story to the public, and the FDA has meanwhile been suggesting that it’s not getting the information that it needs from you.

AB: We’re trying to solve the same problem as the FDA actually. Our interests are really aligned in that they want to see smokers move to reduced risk products while minimizing the uptake by youth and other unintended consequences, and so do we. So it’s really a question of, how do we get there collectively. And we need to work with them.

TC: As you point out, you’re staring at a huge opportunity. Why don’t you just get rid of the flavored e-cigarette liquids, which is what the FDA hates the most? There’s much more evidence to suggest that flavor profiles entice children to use your product versus help adults switch over to your products.

JM: All options are on the table. And that’s one of them.

Look, this issue has to be resolved. We mean that. We have absolutely no interest in any underage consumer ever using these products. It is detrimental to the mission of the company. We are not a major tobacco company. We have not saturated this market. We are less than 0.5 percent of the global tobacco market. And all of this upside will only be achieved if we create goodwill and stand out in contrast to the way tobacco companies have traditionally behaved.

Removing flavors is certainly on the table. But we have not seen evidence that there’s causation necessarily for flavors being a lead-in for underage consumers. Cigarettes have been a major problem for underage consumers for some time. What we do see strong evidence of internally is a much stronger correlation for adult consumers staying away from cigarettes as they move further from everything that reminds them of cigarettes in the first place, which includes the taste of cigarettes.

TC: How are you tracking the reasons that smokers are gravitating toward your products and staying? How can you say that it’s because of the flavors, versus them wanting to quit traditional cigarettes?

JM: That is evidence that is amongst the many, many, many things that we will be sharing with the FDA.

TC: In the meantime, have you talked to the tobacco companies? Have you fielded any offers?

AB: We know many folks in the tobacco industry but we’re very proudly independent and continue to grow the company independently.

JM: Obviously, the big concern for pretty much anyone, including us, is what does that mean to the mission of the company, to consider partnering with, working with, the major tobacco companies. We’ve done that in the past. Many, many years ago, we had a partnership with the third largest global tobacco company [which bought the trademark and IP for Monsees’ and Bowen’s earliest vaporizer, called Ploom]. Then we bought them out of the deal; we parted ways.

Look, if a partnership with a major tobacco company — if, frankly, any number of things that we could do — will accelerate the decline of adult smoking and improve the lives of consumers around the world, we would certainly consider it. We’re not necessarily convinced at this moment that that’s the move that would make that happen.

TC: Before you go, the FDA today also said it’s considering banning the online sale of e-cigarettes. How much would that impact your business?

AB: The majority of our sales are actually offline, though we still think that online is an important route of access for adult smokers to get the product. Fortunately, there are very strict age-verification technologies you can employ, and we have the strictest in place, so it’s a matter that we think should be addressed just by employing very rigorous age verification, on our own site and by requiring that any e-commerce resellers we work with use those strict controls, as well.


Source: TechCrunch

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