By Saabira Chaudhuri
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 7, 2017).
Big Tobacco is working on its next act, as cigarette sales
decline around the world and once-breakneck growth from the first
wave of e-cigarettes fades.
Three of the world's biggest tobacco firms are rolling out new,
electronic tobacco-heating devices they say are healthier
alternatives to traditional smoking, but feel more like puffing on
a real cigarette. That is a sensation many smokers complain is
missing from the wide array of electronic cigarettes currently on
the market.
None of the new heat-not-burn devices -- which heat real tobacco
instead of the nicotine concoction typical in most e-cigarettes --
are available yet in the U.S., but that may be changing soon.
Last month, the Food and Drug Administration indicated it would
take a friendlier approach to cigarette alternatives as a mechanism
to help smokers shift to safer options.
"In just the last few years, we've seen the advent and adoption
of new product categories that may be able to deliver nicotine
without having to burn tobacco," said FDA Commissioner Scott
Gottlieb.
Philip Morris International Ltd. is seeking FDA approval for a
heat-not-burn device called IQOS. Through a partnership with Philip
Morris, Altria Group Inc. -- once part of the same company -- hopes
to sell IQOS under the Marlboro brand in the U.S., one of the
industry's most profitable markets. It also hopes to market the
product as safer than cigarettes -- a health claim that must be
approved by the FDA.
British American Tobacco PLC plans to apply next year for FDA
approval to sell its tobacco-heating device, Glo.
Some early success overseas is raising hope among investors and
analysts that the "heat-not-burn" category could give Philip
Morris, BAT and others a fresh lease on life.
For years, cigarette makers have been able to raise prices to
make up for falling volumes. But executives know that can't last
forever, and big tobacco firms have been scrambling to come up with
alternatives.
For Philip Morris, the stakes are high. Unlike rivals BAT and
Japan Tobacco Inc., which have rolled out an array of cigarette
alternatives, Philip Morris has directed most of its efforts at
IQOS, opening dedicated stores in cities like London and Tokyo to
sell the device.
Makers of heat-not-burn devices claim such products are
healthier than cigarettes, but to a lesser extent than
e-cigarettes. The e-cigarettes currently on the market typically
heat a liquid to create a nicotine-laced, inhalable vapor. Tobacco
firms have rolled out their own versions, including "cigalike"
products that look like old-fashioned cigarettes. So have hundreds
of smaller competitors, many of which have concentrated on bigger,
refillable vaporizers.
These devices have spread quickly, but once-torrid sales growth
has cooled recently. In 2014, U.S. e-cigarette sales grew 130%
year-over-year, according to Euromonitor International, a
market-research firm. Last year, growth was 21%.
The slowdown is partly the natural consequence of a maturing
market. But safety worries and regulatory hurdles, particularly in
the U.S., have also curbed sales.
Another big impediment: customer satisfaction. Some users
complain they aren't getting their blast of nicotine fast enough,
or miss a real cigarette's "throat hit" -- industry speak for what
smokers say is the feeling of smoke traveling down the throat.
Philip Morris, BAT and Japan Tobacco are hoping they have solved
the problem by going back to the tobacco leaf. Their devices heat
-- instead of burn -- the ground leaf to deliver a nicotine vapor
they say is safer than cigarettes. It also tastes and feels more
like a real cigarette, these makers claim.
"The taste satisfaction is very important," said Philip Morris
Chief Executive Andre Calantzopoulos. "The closer you are to this,
the more chances you have to switch people."
BAT's Glo and Philip Morris's IQOS include a heating device for
disposable, tobacco-packed "sticks" that look and feel like
ordinary cigarettes. Japan Tobacco's Ploom Tech takes a more hybrid
approach, using tobacco capsules through which vapor generated from
liquid in a cartridge passes. BAT's iFuse, another hybrid device,
heats a nicotine-containing liquid into an inhalable vapor, which
then passes through a tobacco section.
BAT's U.S. business, Reynolds American, has for years sold
Eclipse, but the product hasn't gained traction and has very
limited distribution.
Philip Morris is ahead of the pack. The company sells IQOS in
over 25 countries. In Japan -- where e-cigarette sales are heavily
restricted -- IQOS has lured enough smokers since launching
nationwide last summer to account for about 10% of the overall
cigarette market, according to the company.
"They absolutely have a first-mover advantage," said Euromonitor
analyst Shane MacGuill. The new product is also expected to bolster
the bottom line. Piper Jaffray analyst Michael Lavery estimates
IQOS profit margins currently run about 30% to 50% higher than
regular cigarettes. He says IQOS could contribute 15% of Philip
Morris's profit by 2019.
Shareholders have taken notice. Philip Morris's stock has
outperformed rival BAT, largely because of the success of IQOS.
Euromonitor expects the heat-not-burn sector to bring in $15.4
billion by 2021, and constitute 45% of the tobacco-alternatives
market, up from 17% last year. E-cigarettes are expected to shrink
from 83% of the current tobacco-alternative market to 55%.
But sales of cigarette alternatives still pale in comparison to
cigarettes. Euromonitor expects tobacco heated products and
e-cigarettes to make up just 3% and 4% of total cigarette market --
excluding China -- by 2021.
A question mark still hangs over whether the products will get
the green light in the U.S., while some are skeptical about their
safety. A May study by Swiss researchers found that IQOS released
some of the same cancer-causing chemicals found in traditional
cigarettes. The authors have called for more independent research
to evaluate IQOS's health effects. In response, Philip Morris in
June wrote a letter to top officials at the three Swiss
institutions questioning the researchers' methodology.
"We think heated tobacco products have huge potential in the
future," said Ian Jones, Japan Tobacco's vice president of reduced
risk products. "But there's still some huge unknown questions that
need to be looked at."
--Jennifer Maloney contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
August 07, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
British American Tobacco (NYSE:BTI)
Historical Stock Chart
From Aug 2024 to Sep 2024
British American Tobacco (NYSE:BTI)
Historical Stock Chart
From Sep 2023 to Sep 2024