Philip Morris International Gets Serious About Reduced Risk

By Dan Caplinger Markets Fool.com

Across the globe, the Marlboro cigarette brand has been extremely successful over the span of decades. Philip Morris International (NYSE: PM) has reaped the benefits of the popularity of Marlboro and other key cigarette brands, and cigarettes still make up the vast bulk of the company's overall sales. But lately, a shift toward alternatives to cigarettes has taken hold among consumers, and Philip Morris has been surprisingly quick to embrace the idea that reduced-risk products could eventually supplant traditional cigarettes entirely. Philip Morris today reaffirmed its commitment to pursue reduced-risk product development to what it sees as its natural end: a smoke-free future.

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Image source: Philip Morris International.

Giving consumers what they want

In Philip Morris International's view, the question of why it should proceed with cigarette alternatives simply comes down to what its customers demand. "Adult smokers are looking for product choices that offer the satisfying taste, ritual, and pleasure they get from cigarettes," according to Philip Morris Communications VP Tony Snyder, "but with far lower amounts of the harmful compounds found in smoke." Claiming more than a decade of research and development, Philip Morris now believes that it can deliver what consumers want.

Indeed, the company is calling on groups that have traditionally opposed its efforts to help it move forward. "There is tremendous opportunity to positively impact public health with the availability of better choices than continued smoking," Snyder said, "and we can't do it alone." Philip Morris wants public-health experts, scientists, and regulatory agencies to contribute in urging moves toward less harmful alternatives to smoking regular cigarettes.

IQOS as a case study

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The success story that Philip Morris is holding out as an example of what the future could hold is its IQOS system. The product is one of four that doesn't produce smoke from combusting tobacco. In IQOS' case, the product heats tobacco rather than burning it, producing a vapor that offers a similar experience to smoking. Philip Morris is in the process of rolling out the product more extensively after strong performance in test markets in Japan and Europe over the past couple of years.

To support IQOS and its other reduced-risk products, Philip Morris has hired hundreds of scientists, researchers, and other experts, spending more than $3 billion on product development and scientific research. The early results have been promising, and Philip Morris found enough support for its claims to form the foundation of its application to the U.S. Food and Drug Administration for IQOS as a modified risk tobacco product.

A huge paradigm shift for Philip Morris International

Yet some investors might well be nervous about the extent to which Philip Morris International has embraced this new transformative vision for its business. The company's new website proclaims, "Designing a Smoke-Free Future: How long will the world's leading cigarette company be in the cigarette business?"

What's clear from the move is that Philip Morris believes that the odds are stacked against it when it comes to its traditional cigarette business. That attitude makes sense, given the recent uptick in the level of regulatory and public-health activity concerning smoking. If Philip Morris concludes that in the long run, smoking will disappear in its current form, then its best chance at surviving is to urge a shift toward similar products that eliminate a substantial portion of the risk involved.

Will Philip Morris' strategy work?

How successful this strategy will be depends on how much buy-in Philip Morris gets from other stakeholders. Some advocates will argue that after having made so much progress toward eliminating smoking, adopting an alternative that has even a small fraction of the same negative health impacts as traditional cigarettes is unacceptable. Yet others will be willing to take a more balanced approach, seeing the move as a compromise that will have beneficial impacts compared to the status quo.

Going forward, Philip Morris will face an interesting set of challenges in advocating for such a dramatic shift in its business. If things go well, however, Philip Morris International will have seemed to have incredible foresight in predicting what in hindsight will seem like the inevitable evolution of the tobacco industry.

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