Altria (NYSE:MO) may see its $13 billion investment in electronic cigarette leader Juul as a means of getting in front of government regulation of the devices, and Juul might view it as a way to vastly increase its distribution and marketing. But the Food and Drug Administration is hopping mad about the partnership, apparently seeing it as both companies going back on their pledge to limit teen access to e-cigarettes.

FDA Commissioner Scott Gottlieb told The New York Times that Altria and Juul made specific commitments to the agency regarding what was causing the explosion of teen e-cig usage, and the investment undermines what they said. He is going to have both companies' management answer in person for their actions.

Juul electronic cigarette charging in a laptop

Image source: Juul Labs.

Rising tide of e-cig usage

According to the FDA, there is an "epidemic" of teen e-cig usage. A survey conducted by the Centers for Disease Control and Prevention found the number of high school students using e-cigs in the previous month rose 78% year over year, from 11.7% of students in the group in 2017 to 20.8% in 2018, while the number of middle schoolers rose from 3.3% to 4.9% of students in this age group.

Students who identified as regular users, or those who vaped 20 or more days, jumped from 20% of high school students to 27.7% while middle school students saw an increase from 12.9% to 16.2%.

It certainly looks like things are getting out of control, and to combat teen access to e-cigs, the FDA imposed new restrictions on where e-cig flavors can be sold, allowing only tobacco, mint, and menthol flavors to be sold at convenience stores, gas stations, and other locations where the general public can buy them, and limiting fruit and dessert flavors to adults-only stores, like vape shops.

Pod-based e-cigs being targeted

Ahead of the regulatory move, Altria announced it was withdrawing its pod-based e-cigs from the market while selling only so-called "cigalikes" until the FDA fashioned regulations. Pod-based e-cigs allow users to refill a device with flavored e-liquids, while cigalikes are designed to look like a cigarette. Juul followed by saying it would voluntarily stop selling fruit flavors like mango, fruit, creme, and cucumber at all stores, adult-only or not (though they will sill be available for purchase on the company's website).

While the actions of both companies would seem to be in the spirit of what the FDA wanted, the FDA sees Altria's investment in Juul as backtracking on their commitment, because the agency views pod-style e-cigs such as those Juul sells exclusively as the root cause of the teen usage problem. Altria apparently agrees.

During its third-quarter earnings conference call with analysts last October, chairman and CEO Howard Willard said, "We concluded that the driver of the recent increase we think is pod-based products and flavored products, and so we thought that the two actions that we took (removing pods and selling only cigalikes) addressed the drivers of the increased youth usage here in the short run."

By investing in Juul, Altria was giving the e-cig maker, which has a better than 80% share of the market, an even broader distribution platform and potentially putting Juul devices in the hands of more teens. Juul e-cigs are the most popular with teens, possibly because of their design: They resemble an oversized thumb drive.

Benefits outweigh the disadvantages

The problem with the FDA's criticism of e-cigs is that they are doing exactly what manufacturers and proponents have said they would -- reducing cigarette smoking. Teen use of cigarettes has hit historic lows since it was first measured in 1991, according to a study from the University of Michigan's Institute for Social Research, with rates falling significantly in 2017, which also happened to be the first time e-cig usage was measured.

While there may be an uptick in some casual use of e-cigs among teens due to the "cool factor" of the Juul device, many of those using e-cigs are doing so to switch from smoking, the same reason adults are switching to vaping. By restricting where and what kind of e-cigs are available, the FDA could very well undermine the positive benefits of the devices compared to traditional cigarettes.

The FDA is mad at Altria and Juul, but their partnership could bring about the ultimate results the agency is looking for.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.