* E-cigarette maker Juul says CEO is stepping down
* Juul, backed by Altria, suspends U.S. advertising
* Tobacco giants Philip Morris, Altria axe merger talks
* Comes amid regulatory scrutiny of vaping globally (Adds Altria CEO and analyst comments, source close to the deal)
By Siddharth Cavale and Nivedita Balu
Sept 25 (Reuters) - The chief executive of e-cigarette maker Juul stepped down on Wednesday as merger talks between its biggest investor Altria and Philip Morris collapsed in the face of a regulatory backlash against vaping that could reshape the industry.
Juul Labs, in which tobacco giant Altria Group Inc owns a 35% stake, is facing intense scrutiny in its home market as teen use of e-cigarettes surges. The company, which faces a U.S. ban on some products, said on Wednesday that it would suspend all advertising in the country.
Marlboro makers Philip Morris International Inc and Altria, announcing the end of their $187 billion merger talks, said they would instead focus on the joint launch of tobacco-heating product iQOS in the United States.
Philip Morris walked away from the negotiations with Altria as the regulatory risk around Juul increased, according to a source familiar with the discussions. Philip Morris was also concerned about the performance of its shares, as investors concerned about a tie-up with Altria expressed their dissatisfaction, the source added.
Vaping devices such as Juul's, which vaporize liquid containing nicotine, have borne the brunt of the regulatory crackdown globally.
The iQOS, which heats but does not burn tobacco, is a rival non-smoking technology and, crucially, has been authorized by the U.S. Food and Drug Administration (FDA).
When the talks were announced last month, the potential for Juul and iQOS to dominate the biggest vaping markets globally was seen as central to the logic of a deal. It would have seen the tobacco companies reunite a decade after their split and created an industry heavyweight with a combined market value of $187 billion, triple its closest rival, British American Tobacco Plc.
However, some investors were skeptical of the synergies the deal would generate and a steady rise in number of vaping-related deaths and illnesses reported in the United States may also have changed the companies' thinking.
The Trump administration in the United States has announced plans to remove all flavored e-cigarettes from store shelves due to rising popularity among teenagers.
The share of high school students using e-cigarettes has more than doubled over the past two years, with 27.5% reporting they had tried an e-cigarette in the past month, according to preliminary federal data. U.S. health officials are also investigating an outbreak of hundreds of severe lung illnesses and nine deaths linked to vaping.
In its announcement on Wednesday, Juul also said it would not lobby the administration over the proposed ban on flavored products.
Flavored e-cigarettes represent 80% of Juul's sales. The FDA's plan to pull all e-cigarette flavors from the market, along with bans in some markets, have pushed Juul's valuation down to about $25 billion, from $38 billion when Altria invested in it, according to Morgan Stanley.
The FDA earlier this month warned the company about marketing its products as safer than traditional cigarettes and requested more documents and information within 30 days.
Federal prosecutors in California are conducting a criminal probe into Juul, the Wall Street Journal reported on Tuesday, though the focus of the probe was unclear.
South Korea and India last week became the latest countries after Brazil and Thailand to ban or warn about the sale of e-cigarettes.
Howard Willard, CEO of Altria, called vaping a key component of harm reduction among smokers.
"We must acknowledge ... vaping is at an inflection point," he said at the Global Tobacco and Nicotine Forum in Washington on Wednesday. Willard urged tobacco companies to better educate the public on the risks of smoking and vaping.
'FULL-FORCE' IQOS LAUNCH
Stifel analyst Christopher Growe said Altria, which holds the license to sell iQOS in the United States, would embark on a "full-force" effort to launch the product, taking advantage of being the only tobacco-heating product approved for sale.
The company is expected to launch the product in Atlanta "imminently" and then quickly broaden distribution, he said. Philip Morris will sell iQOS in all other markets.
San Francisco-based Juul said it was replacing CEO Kevin Burns with K.C. Crosthwaite, a Philip Morris USA veteran and most recently the chief strategy and growth officer of Altria, a sign of Altria's growing influence over Juul after its $12.8 billion investment in the e-cigarette maker last December.
Bringing in a tobacco veteran to lead Juul is a chance to extend an olive branch to the FDA and may indicate that Juul intends to work with regulators. Altria has many more years of experience than Juul dealing with regulators such as the FDA.
Burns, a former private equity executive who came to Juul in late 2017 from yogurt maker Chobani, presided over meteoric growth at the company as it morphed from a 300-person startup to an international operation employing thousands.
His tenure also coincided with the sharp rise in teenage e-cigarette use and a regulatory crackdown on the industry.
Shares in Philip Morris rose 5.2%, while Altria fell 0.4%. Rivals British American Tobacco and Imperial Brands Plc rose 3.3% and 2.3%, respectively.
Reporting by Siddharth Cavale and Nivedita Balu in Bengaluru; Additional reporting by Chris Kirkham in Los Angeles; Editing by Peter Henderson, Pravin Char and Lisa Shumaker