How Is Philip Morris Working Towards A Smoke-Free Future?

January 31st, 2017 by Trefis Team

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Philip Morris International

Philip Morris International (NYSE:PM), on January 25, reaffirmed its commitment to designing a smoke-free future. The company’s momentum continues to grow behind a full-scale effort to market smoke-free products that can ultimately replace cigarettes, after a successful iQOS launch, which has converted over a million adult smokers to it. According to Tony Snyder, Vice President of Communications, adult smokers are looking for products “that offer the satisfying taste, ritual, and pleasure they get from cigarettes, but with far lower amounts of the harmful compounds found in smoke.” PM has hired over 400 scientists and experts, along with an investment of more than $3 billion in research, product development, and scientific substantiation.

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Developing Cigarette Alternatives

When a cigarette combusts, it burns tobacco leaves to generate smoke, which contains nicotine, naturally found in tobacco, as well as many harmful chemicals. According to PM, it is these harmful chemicals, and not the nicotine, in cigarette smoke which is the primary cause of smoking-related diseases. It is for this reason that the company is developing alternatives to cigarettes, products without the smoke, but with nicotine and taste that can satisfy the existing smokers. In this regard, the company has a two-pronged product focus; one is to heat tobacco to generate a nicotine-containing vapor, while reducing the level of harmful chemicals, and the other way is to produce a nicotine-containing vapor, without using tobacco.

Laboratory tests on the aerosol of the company’s most advanced smoke-free alternative, iQOS, have shown significantly lower levels of harmful and potentially harmful constituents (HPHCs), and reduced toxicity than cigarette smoke. Furthermore, one 90-day study in the US, and one 90-day study in Japan, reported that smokers who switched completely reduced their exposure to selected HPHCs, approaching those observed in people who quit smoking for the duration of the studies. IQOS is currently present in key cities in 15 markets worldwide, including Japan, Canada, Germany, Italy, and the UK, with plans to make it available in key cities in over 30 countries by the end of 2017. The company has also filed a Modified Risk Tobacco Product Application (MRTPA) for the product with the US FDA.

iQOS- Reduced Toxicity

Need For Alternatives

According to WHO estimates, there will be over a billion smokers by 2025. With such a huge demand for tobacco products in the future, the presence of less harmful alternatives to cigarettes is essential. For this, not only do alternatives need to be developed, but they also must be appealing to consumers. A significant health benefit can only be achieved when a large number of smokers switch from cigarettes to such products. The company’s innovation pipeline includes four product platforms that can meet the varying preferences of adult smokers, aiding them in the switch.

Philip Morris also aims to transition its resources from cigarettes to smoke-free alternatives in the future, and has proposed regulatory policies that encourage the replacement of cigarettes with such alternatives. The company has recognized the serious health risks posed by cigarettes and other tobacco products. Hence, accordingly, they feel an obligation to develop and market products responsibly. Success in the cigarette business has given them the resources to pursue this ambitious vision.

Given the demand for these products, the iQOS platform has the potential for expanding the profit pool growth of combustible cigarettes and Reduced Risk Products (RRPs) in the next decade by 400 basis points, to a 12.5% CAGR for Philip Morris, according to a Wells Fargo analysis. Further, it was also found that iQOS could displace up to 30% of the cigarette industry in developed markets by 2025, speeding up the premiumization of the market. This lends credence to the fact that iQOS could be a game-changer for Philip Morris in the years to come.

Tremendous Growth Seen By iQOS In Japan

iQOS has witnessed phenomenal growth in Japan, since it was first launched, with its market share steadily climbing. During FY 2015, the iQOS launch was expanded in Japan to reach 60% of the adult smoking population, and the national roll-out was completed in the beginning of the second quarter of FY 2016. For the third quarter, the HeatSticks market share increased to 3.5%, an increase of 1.3 points, compared to the second quarter. Furthermore, the share in the last week of September, reached an estimated 4.3%, and an even higher 7.3% in Tokyo, despite limited expansion due to supply constraints. According to the latest data supplied by the company, the weekly market share increased to 4.9% in October. Moreover, the level of cannibalization has also come down, from 40% seen earlier to 35% in the second quarter.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more

intuitively. For precise figures, please refer to our complete analysis for Philip Morris International.

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