Philip Mor­ris’s to­bacco gam­bit: Stop burn­ing it

Philip Mor­ris makes a de­vice to heat—rather than burn—to­bacco “The holy grail of a com­mer­cially suc­cess­ful ‘safe’ cig­a­rette”

Bloomberg Businessweek (Asia) - - CONTENTS - −Thomas Mulier, Sam Cham­bers, and Dan Lief­green

On a tree-lined street of stately 19th cen­tury palazzi in cen­tral Mi­lan, there’s a store­front with glossy par­quet floors, sub­dued blue light­ing, and walls dis­play­ing large-for­mat color por­traits of trendy young peo­ple—it looks like it might be an art gallery or chic hair sa­lon, but it sells Marl­boros.

The shop is what cig­a­rette maker

Philip Mor­ris In­ter­na­tional

calls an em­bassy for iQOS, a €70 ($79) de­vice that gives a nico­tine hit by heat­ing to­bacco in­stead of burn­ing it. Since Novem­ber 2014 the com­pany has set up about 10 such out­lets in Italy and Ja­pan where vis­i­tors can sam­ple Marl­boro HeatSticks, which users say are more like smok­ing than e-cig­a­rettes and of­fer a stronger buzz. An­dre Calant­zopou­los, chief ex­ec­u­tive of­fi­cer of Philip Mor­ris, told in­vestors in Fe­bru­ary that the tech­nol­ogy puts the in­dus­try “on the cusp of a rev­o­lu­tion” that may im­prove pub­lic health with a safer al­ter­na­tive to smok­ing, while adding as much as $1.2 bil­lion in profit.

Philip Mor­ris has spent more than $2 bil­lion de­vel­op­ing smok­ing al­ter­na­tives, in­clud­ing a sim­i­lar prod­uct called Heat­bar that flopped a decade ago. It doesn’t claim iQOS is health­ier than smok­ing—it’s sold with a warn­ing that the safest op­tion is to avoid to­bacco al­to­gether. But the com­pany has 300 sci­en­tists search­ing for proof that iQOS may re­duce the risk of smok­ingre­lated dis­eases, and iQOS brochures say it emits fewer harm­ful sub­stances than cig­a­rettes and that clin­i­cal tests are un­der way to com­pare the risks.

As ri­vals try to catch up and reg­u­la­tors ponder whether to sup­port such ef­forts, an­ti­smok­ing groups are push­ing back. “Time and again, Philip Mor­ris In­ter­na­tional has been caught ly­ing to the pub­lic about the health ef­fects of its prod­ucts,” says Cloe Franko, a se­nior or­ga­nizer at Cor­po­rate Ac­count­abil­ity In­ter­na­tional, a Bos­ton non­profit that op­poses to­bacco com­pa­nies.

To use iQOS, a smoker in­serts a tube of to­bacco that looks like half a cig­a­rette into a de­vice about the size of a fat ball­point pen. The to­bacco is skew­ered on a metal blade that heats it to about 500F, a third the tem­per­a­ture of a burn­ing cig­a­rette, pro­vid­ing a dozen or so puffs. The taste is akin to a tra­di­tional cig­a­rette, and the sticks smell like to­bacco, though less odor re­mains af­ter they’re con­sumed. The de­vice must be recharged af­ter each pack of 20 sticks, which cost €5 in Italy, vs. about €5.20 for a pack of tra­di­tional Marl­boros.

An­a­lysts say it could be more suc­cess­ful be­cause it gives a bet­ter nico­tine buzz than an e-cig­a­rette and imit im­i­tates the rit­ual of smok­ing. Sales of e-cig­a­rettes are only about 1 perc per­cent of the $863 bil­lion to­bacco ma mar­ket, ac­cord­ing to re­searcher E Euromon­i­tor In­ter­na­tional. An­a­lysts at Wells Fargo pre­dict t that Philip Mor­ris’s HeatSticks c could dis­place as much as 3 30 per­cent of cig­a­rette sales in de­vel­oped mar­kets by 2025. Bri­tishBri Amer­i­can To­bacco aims to start sell­ing a sim­i­lar prod­uct in the se­cond half of 2016; Reynolds Amer­i­can is de­vel­op­ing a heat­ing de­vice, though it re­ported that one tested in Wis­con­sin last year didn’t meet per­for­mance ex­pec­ta­tions; and Ja­pan To­bacco is in­tro­duc­ing a va­por­izer called Ploom Tech. But Philip Mor­ris is far ahead of the com­pe­ti­tion, says James Bush­nell, an an­a­lyst at Ex­ane BNP Paribas. “This is the clos­est yet that the in­dus­try has got to the holy grail of a com­mer­cially suc­cess­ful ‘safe’ cig­a­rette,” he wrote in a re­cent re­port.

In Ja­pan more than 100,000 smok­ers have switched to iQOS, and Philip Mor­ris says HeatSticks ac­counted for 2.4 per­cent of the Tokyo cig­a­rette mar­ket in Jan­uary. Philip Mor­ris says it will sell iQOS in about 20 coun­tries this year, and it plans to sub­mit an ap­pli­ca­tion to the U.S. Food and Drug Ad­min­is­tra­tion to call the de­vice a mod­i­fied-risk to­bacco prod­uct, though the FDA hasn’t yet given the go-ahead to sim­i­lar re­quests.

Philip Mor­ris cre­ated the “em­bassies” to pro­mote iQOS, given bans on to­bacco ad­ver­tis­ing in many coun­tries. Rem­i­nis­cent of Nestlé’s Nespresso shops, the em­bassies or­ga­nize events for iQOS users to so­cial­ize and spread the word. “We’re ex­pand­ing our mar­ket­ing tool­box,” Miroslaw Zielin­ski, head of the to­bacco com­pany’s “re­duced-risk” busi­ness, said in a we­b­cast in Fe­bru­ary. “This has been un­de­ni­ably a much more com­plex un­der­tak­ing than cig­a­rette mar­ket­ing.”

The bot­tom line Philip Mor­ris says heat­ing to­bacco may be safer than burn­ing it, but an­ti­smok­ing groups don’t buy it.

Marl­boro HeatStick

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