Tobacco giant Philip Morris International (NYSE: PM) has been a key player in the global tobacco market for years, and it has impressive market share in selling cigarettes in dozens of countries around the world. But to an even greater extent than many of its peers, Philip Morris International has seen the future of the industry, and it believes promoting reduced-risk products is the best way to overcome resistance to traditional cigarettes and to sustain its competitive advantage.
Philip Morris has been particularly aggressive with its iQOS heat-not-burn technology, and the product has seen considerable success in Japan and other initial test markets. Now, Philip Morris has made a key move for iQOS by looking to the U.S. Food and Drug Administration to approve the cigarette alternative. Let's look more closely at Philip Morris International's decision and how it could put both it and partner Altria (NYSE: MO) in position to get first-mover status in the key U.S. market.
iQOS is Platform 1 in Philip Morris International's portfolio of reduced-risk products. Image source: Philip Morris International.
What Philip Morris is asking the FDA for
Specifically, Philip Morris International submitted what's known as a Modified Risk Tobacco Product application to the FDA on Monday. The company's press release with respect to the application was short, noting simply that by doing so, Philip Morris had lived up to its goal of making an appeal to the FDA before the end of 2016. The company said it should take the FDA a minimum of 60 days to consider the request by doing an administrative review. At that point, the FDA will make a determination of whether to accept the application for a more extensive review of the substance of Philip Morris' claims.
Altria also made a statement with respect to Philip Morris' FDA application, because the two companies have been partners in their efforts to look into reduced-risk products. The press release was equally short, but it reminded investors that under the terms of the collaboration between the two tobacco giants, Altria will have exclusive rights to sell the iQOS product in the U.S. if the FDA grants approval.
Why investors are watching closely
The potential for Philip Morris and Altria to shake up the U.S. market with iQOS is considerable. So far, the traditional cigarette alternatives available in the U.S. have centered more on liquid-based products that produce a vapor without any tobacco at all. These products haven't been able to make any claims of being approved by the FDA, and while many customers enjoy the experience, they don't have the same tie to traditional tobacco that other customers would like to see.
By contrast, iQOS takes actual tobacco and heats it up, which produces a vapor directly from the tobacco HeatSticks iQOS uses. For many users, that connection to tobacco has some appeal, and Philip Morris has said that it believes the resulting vapor has less than a tenth of the chemicals that produce health risks in regular cigarette combustion.
Philip Morris isn't the only company looking at ways to heat tobacco without burning it to provide a reduced-risk experience. But what has many tobacco stock followers excited is the fact that Philip Morris could end up being the first among the industry's biggest players to get such a product through the FDA process. If it's successful, two positive benefits will result. First, Philip Morris will get to license iQOS to Altria and have the U.S. tobacco giant market the product domestically with the marketing advantages that FDA approval will bring. Second, Philip Morris will be able to point to a positive FDA decision when it works with other government regulators around the world, and the company might well get better treatment abroad if it can successfully navigate the gauntlet of regulations the FDA process entails.
Looking ahead for Philip Morris
Finally, Philip Morris International's FDA application for iQOS will give it valuable experience for when the company moves forward with other reduced-risk alternatives. The iQOS product is furthest along in development, but the global tobacco player has other ideas in mind that could also gain traction among customers seeking an alternative to cigarettes.
It will likely take a long time for the FDA to consider Philip Morris International's entire application, and there's no guarantee the company will ever get approval for iQOS. Nevertheless, just the attempt shows the depth of commitment Philip Morris has toward potentially transforming its entire business model going forward.
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