LONDON - The spark of renewed growth that Imperial Brands promised investors has fizzled before it heated up. The regulatory cloud enveloping e-cigarettes in the United States has also choked the traditional tobacco company.

On Wednesday, investors in the British group celebrated as U.S. rivals Altria and Philip Morris International dropped talks about a possible $200 billion merger. One reason the deal flopped is because U.S. regulators have turned against vapour-based cigarette alternatives. The blowback is particularly aimed at Juul Labs, a maker of flavoured vaping products much loved by underaged teens, which is 35% owned by Altria.

Imperial Brands cannot escape the fallout, though. On Thursday, the company run by Alison Cooper said it expected revenue at its Next Generation Product division – which makes e-cigarettes, powders and heated tobacco – to grow by 50% in the year to the end of September. That’s a dramatic drop from the 245% top line increase Imperial Brands reported for the six months to March. UBS analysts now expect the division to generate full-year revenue of 280 million pounds, implying second-half revenue will be lower than in the previous six months.

Suspicion that vaping can lead to severe lung-related illnesses has prompted retailers to stop ordering the products and caused consumers to think twice. A Reuters poll conducted last week found that 63% of American adults disagreed that vaping is healthier than traditional cigarettes, up 16 percentage points from a similar poll in 2016.

With estimated revenue of 9 billion pounds in the current financial year the vaping slowdown is a minor blip for the maker of declining cigarette brands like Winston and Gauloises. Unlike Altria, which poured almost $13 billion in Juul, Imperial Brands’ e-cigarette investments have been modest. However, Thursday’s warning is a setback for a division earmarked to produce revenue of up to 1.5 billion pounds by 2020.

Vaping may get a reprieve in May next year when the U.S. Food and Drug Administration concludes whether the products pose a health risk. Yet other countries like India have banned e-cigarettes. Imperial Brands’ slow inhaling of vaping products has spared it worse damage. But the 10% drop in the company’s share price on Thursday, which wiped 1.9 billion pounds off its market value, implies investors’ hopes for a new lease of life for nicotine have vanished in a cloud of steam.

CONTEXT NEWS

- Imperial Brands on Sept. 26 cut its revenue outlook for the full financial year of 2019, from the forecast of at or above the upper end of a 1%-4% range to around 2%.

- The group said this was driven by a weaker performance from Next Generation Product, a unit that focuses on e-cigarettes and vapour-based products, as more wholesalers and retailers declined to order or allow promotion of vaping products amid regulatory uncertainty.

- The expected constant earnings per shares guidance was also cut from the bottom-end of a 4%-8% range to “broadly flat”.

- The U.S. Food and Drug Administration is investigating more than 150 vaping products and substances and said it has activated its criminal investigations arm to explore the supply chain of vaping products and identify the cause of the recent outbreak of vaping-related illnesses and deaths.

- Imperial Brands’ share price fell 10.3% to 1,851 pence at 0825 GMT on Sept. 26.

(Editing by Peter Thal Larsen and Amanda Gomez)

© Reuters News 2019