What Philip Morris International's Latest iQOS Update Means for Investors

Philip Morris International (NYSE: PM) is undergoing a radical shift away from cigarettes toward reduced-risk products, and its iQOS heated-tobacco system has enjoyed unparalleled success in key markets like Japan. The company strongly believes that it needs to demonstrate scientifically the potential benefits that iQOS and other reduced-risk offerings have compared to traditional tobacco products. Earlier this month, the company released its latest scientific update on its efforts on the reduced-risk front.

Why Philip Morris is relying on science

More than 300 scientists at Philip Morris are working on ways to reduce the harm from smoking. As Chief Scientific Officer Manuel Peitsch admits, many of those scientists were initially skeptical about the company's true commitment to finding solutions. Yet Philip Morris has adopted the philosophy that it needs to prove scientifically that less harmful products can exist in order to convince regulators that they can work together to achieve public health goals through reduced-risk products.

So far, those efforts have fallen into two general categories. Heated tobacco products use tobacco, but they don't burn it, instead keeping temperatures below 400 degrees Celsius. Doing so is intended to reduce levels of toxicants produced from combustion while preserving the taste and sensory satisfaction that traditional cigarette smoking gives smokers. By contrast, Philip Morris' other category of reduced-risk products don't use tobacco. Instead, they precisely control the composition of an aerosol in a way that can minimize adverse health impacts and provide a different but still satisfying experience for customers.

The results of Philip Morris International's scientific explorations have been enlightening. Studies in both the clinical and non-clinical realms point to risk reduction from electronically heated tobacco products, and early research in using carbon-tip heat sources rather than electronic heating has shown comparable results to electronic heating thus far. On the e-vapor front, products using nicotine's chemical attributes to make a breathable vapor have shown similar profiles to smoking in terms of nicotine delivery, and studies on the more common battery-powered vaporizing e-cigarettes are expected to produce a final report early next year.

How Philip Morris sees iQOS developing

For investors, the biggest question is how Philip Morris can navigate the U.S. Food and Drug Administration process for getting iQOS approved as a modified-risk tobacco product. The company's scientists see it as a step-by-step process:

• Product design is tailored to determine the chemistry and physics of the resulting aerosol, with the intent of reducing the formation of harmful constituents.
• The company performs toxicity tests in order to establish the reduction of potentially harmful chemical compounds, as well as to look more closely at biological systems and the impact of the product on their healthy operation.
• Clinical studies assess the long-term impact of reduced exposure to risk factors, hopefully establishing a beneficial impact on public health more broadly.
• Studies also look at consumer perception of reduced-risk products to see how they impact customer behavior.
• After a product is introduced, the company would continue to look at its use, conducting studies to ensure that the expected health impacts in fact occur.

The idea of this process is to give the FDA a road map to follow in fulfilling its role as a regulatory overseer. It also commits Philip Morris to a set of responsibilities in assessing and evaluating its reduced-risk products that it can then use to demonstrate success or failure on future releases.

Be smart about science

The more that Philip Morris can demonstrate scientifically that its newer products have inherent health advantages over traditional cigarettes, the better its reception in front of regulators worldwide will be. Even though moves like these threaten Philip Morris' huge existing traditional cigarette business, the tobacco giant seems certain that efforts to replace regular cigarettes with reduced-risk products mark the best course forward.

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