FDA Approval For iQOS To Be A Game Changer For Altria

Philip Morris International (NYSE:PM) submitted a Modified Risk Tobacco Product (MRTP) application for its electronically heated tobacco product, iQOS, with the US Food and Drug Administration (FDA) on December 5th. This was consistent with the company’s goal of submitting the application in 2016, and the company anticipates the FDA taking a minimum of 60 days to complete an administrative review of its application. Once iQOS gets a go ahead, Altria (NYSE:MO) will get exclusive rights to sell these products in the US. Altria and Philip Morris have been working on reduced risk tobacco products for a while. In 2015, the companies entered into a strategic agreement under which PMI markets Altria’s MarkTen e-cigarettes internationally, while Altria distributes PMI’s heated tobacco products in the US. The companies have also decided to partner on regulatory matters in relation to the products. In this regard, the two companies are working together on the MRTP claim for iQOS.

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According to Reuters, Philip Morris is the first company to seek US approval to market a tobacco product as being less harmful than traditional cigarettes since the new laws were introduced. Once the MRTP claim is approved by the FDA, the company will hold a significant marketing advantage over other reduced risk tobacco products, including e-cigarettes, which are not allowed to make such a claim. The company believes that since its products heats the tobacco, instead of burning it, it will be safer for consumers. The product is already available in several test markets. Philip Morris launched its heat-not-burn technology device – iQOS – in Nagoya Japan in November 2014. Since then, the product has been rolled out in over a dozen locations, including Italy and Switzerland. Japan can be considered as a key region for the company, as it is the only country where the national roll-out of the device has occurred.

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. 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.

Why iQOS Will Shake Up The US Market

The smoking rate has been on the decline in the US since the mid 1960s, as a result of the tax hikes, ban on tobacco marketing and smoking in public places, and growing awareness among the consumers. The smoking rate has come down from 21% in 2005, to under 17% today, and is estimated to decline at a rate of 3% per annum till 2040. The US, from where Altria generates all of its revenue, has had one of the steepest declines in the prevalence of smoking. Moreover, a number of states in the US are considering raising the cigarette taxes in the coming months. This will put increasing pressure on companies, such as Altria, to raise the prices of their tobacco products. Such initiatives will further pound the cigarette volumes of tobacco companies. In the face of such issues, having a reduced risk product in the portfolio will help to guarantee long term success.

Currently, the cigarette alternatives available in the market have centered on liquid-based products that produce a vapor, and contain no tobacco. These products have not been approved by the FDA yet, and the lack of tobacco may not give the same experience as cigarettes that many consumers look for. In this regard, since iQOS uses tobacco, it may appeal to such users, and given the fact that Philip Morris may be the first among the industry’s big players to get FDA approval, it would result in significant benefit to both PMI and Altria.

Have more questions on Altria? Have a look at the links below:

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• How Did The Different Segments Of Altria Perform In Q1 2016?
• Impressive Growth In The Smokeable Products Segment Helps Altria Beat Estimates
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• What Are Altria’s Strengths Driving Long-Term Growth?
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• How Will Altria’s Revenue And EBITDA Change In The Next 3 Years?
• How Has Altria’s Revenue And EBITDA Composition Changed In The Last 5 Years?
• Altria: Year 2015 In Review
• How Has Altria’s Shipment Volume, By Brand, Changed Over The Past 3 Years?
• How Has Altria’s Retail Share In Smokable Products And Smokeless Products Changed Over The Last Year?
• What is Altria’s Revenue And EBITDA Breakdown?
• What is Altria’s Fundamental Value Based On Expected 2016 Results?
• By What Percentage Did Altria’s Revenue & EBITDA Grow In The Last 5 Years?

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