Philip Morris Scores First Victory Against The Thai Government

August 28th, 2013 by Trefis Team
-5.31%
Downside
131
Market
124
Trefis
PM: Philip Morris International logo
PM
Philip Morris International

Philip Morris International (NYSE:PM) scored its first victory against the Thai government with a local court temporarily suspending the government’s plans for larger graphical warnings on cigarette packets. In June, Philip Morris International and the The Thai Tobacco Trade Association (TTTA), which represents 1,400 retailers across the kingdom, sued the Thai government over a new anti-tobacco regulation that required the area covered by graphical health warnings on cigarette packs be increased from 55% to 85% on each side. On Friday, the court ordered suspension of the government’s October 2nd deadline to implement the new rule until it reaches a decision on the pending litigation. [1]

However, if the Thai government prevails in the legal battle against the tobacco industry, it might just be a short relief for the latter from tougher regulations aimed at reducing smoking rates in the country. If we were to go by the results of a similar litigation fought by Philip Morris in Australia against the local government there, it would be a tough legal battle for the company to win. [2]

Philip Morris International is a leading international tobacco company with its products sold in more than 180 nations worldwide. Until its spin-off in March 2008, Philip Morris International was an operating company of Altria Group (NYSE:MO). Excluding the U.S. and China, the company holds more than 28% of the total international cigarette market, led by its flagship brand Marlboro.

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Although public smoking is banned in Thailand, data from the Office of Tobacco Control in the country shows that smoking rates have remained largely stable at around 27% since 2009. This shows that previous attempts by the government to curb adult smoking rates have not been very successful. However, the Thai government expects to reduce the prevalence of smoking among adults by deglamorizing cigarette packs and thereby increase health awareness. [3]

The Thai government aims to cover 85% of the area on each side of a cigarette pack with graphic health warnings, leaving just 15% of the area for manufacturer trademarks and logos. This is a new benchmark in the global tobacco industry in terms of packet area used for health warnings.

In Australia, where the government has implemented the plain packaging law, health warnings are required to cover at least 75% of the front and 90% of the back of a cigarette pack, implying an average of 82.5% of the pack area to be covered by health warnings. The EU members recently agreed to implement a new anti-tobacco law requiring a minimum of 65% of the pack area to be used for health warnings. [4]

The Department of Health and Aging of the Australian government conducted research evaluating the effectiveness of graphic health warnings on cigarette packs in 2008. It concluded that graphic warnings are not only effective in communicating the health effects of smoking and improving consumer knowledge as a result, but also helpful in discouraging the uptake of smoking and preventing relapse as well. [5] Another study conducted in the U.S. concluded that the images of diseased smokers help smokers heed the health warnings about smoking. [6]

Based on a similar litigation in Australia related to the Plain Packaging Act, we do not expect a positive outcome for the tobacco industry or Philip Morris in this case. [2] However, Philip Morris is expected to fight it hard as Thailand is one of its four primary growth markets in Asia; the other three are Indonesia, Philippines and Vietnam. In 2012, Philip Morris reported shipment volume growth of 4.2% in Asia, primarily driven by market share gains in these four growth markets, partially offset by volume declines recorded in Japan and Korea.

We currently have $87 price estimate for Philip Morris International, which is almost in line with the market price.

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Notes:
  1. Philip Morris wins reprieve over cigarette health warnings in Thailand, theguardian.com [↩]
  2. Australia’s Top Court Backs Plain-Pack Tobacco Laws, bloomberg.com [↩] [↩]
  3. Japan Tobacco sues Thailand over cigarette packaging, channelnewsasia.com [↩]
  4. Switch to large pictorial health warnings on cigarette packs, bmj.com [↩]
  5. Evaluation of the Effectiveness of the Graphic Health Warnings on Tobacco Product Packaging 2008, health.gov.au [↩]
  6. Graphic warning labels on cigarette packs ‘work better’, bbc.co.uk [↩]