MO Altria Group Inc

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 (April 20, 2018).

Shares of tobacco companies tumbled after Philip Morris International Inc. said cigarette shipments fell more than expected and sales for its cigarette alternative started to stall in a key market -- raising wider alarm about the health of the entire tobacco industry.

Shares in the New York-listed, Switzerland-based tobacco giant ended down 16%. That was its biggest one-day slide since becoming a public company in March 2008. The disappointing first-quarter results dragged down shares of other giants, like Altria Group Inc., British American Tobacco PLC and Imperial Brands PLC.

Big Tobacco has long been under threat from the steady decline of smoking, particularly in the developed world. But in recent years, the industry has been able to push through price increases to make up for falling volumes -- boosting profits and stock prices. That has enabled big investments aimed at developing smoking alternatives, like e-cigarette devices and other gadgets that promise to deliver nicotine but not the more harmful effects that come with tobacco combustion.

New headwinds have emerged, punctuated by Philip Morris's disappointing quarterly results on Thursday. Overall, the Marlboro maker reported earnings of $1.56 billion on revenue that climbed 14% to $6.9 billion, slightly less than the $7 billion analysts polled by Thomson Reuters had expected.

The company, which sells cigarettes under brands like Marlboro around the world, but not in the U.S., said shipments fell 5.3% during the first three months of the year. That was much steeper than expected -- even considering what analysts expected to be a fairly easy comparison from the year-earlier period.

Drops came in big markets that had traditionally held up better than most, such as Japan, Russia and Saudi Arabia. That underscored fears that decline rates for smoking in some of the markets seen as relatively robust may also be increasing.

More worrying for many investors was Philip Morris's disappointing sales growth for its biggest bet on cigarette alternatives -- a device called IQOS and billed as a "heat not burn" product. The electric device heats a plug of ground tobacco -- but doesn't combust it -- delivering nicotine and an experience that smokers have said is closer to real smoking than vaping or other alternatives. The company says because users don't inhale many of the toxins associated with combustion, the device is safer.

While Philip Morris has rolled the product out in a number of markets, the company is awaiting approval from the Food and Drug Administration in the U.S., which said earlier this year that the science on the device's relative safety wasn't yet conclusive.

One of the most promising markets for the device has been Japan, where IQOS has eaten quickly into the market share of regular cigarettes. But Philip Morris said Thursday that IQOS gained just 3 percentage points of the country's overall cigarette market share, almost half the percentage-point increase in the previous quarter.

"Device sales were slower than our ambitious expectations," Philip Morris Chief Financial Officer Martin King said on a call with investors.

That surprised many observers who had been used to heady growth. The double hit to sentiment about traditional cigarettes and their potential replacements raised broader concern about the future of the industry. BAT and Imperial Brands closed down 5.4% and 2.9%, respectively, in London. Altria -- which Philip Morris hopes to team up with to sell IQOS in the U.S. should it receive approval from the FDA -- was off 6% in trading in New York.

All three companies didn't immediately return calls for comment.

While tobacco companies have so far been able to offset declining volumes with rising prices, that strategy is seen as having limits, and companies are scaling back investments in traditional tobacco operations. Philip Morris and its rivals have spent billions of dollars in recent years to research and market tobacco-heating and other new products they believe will help lure smokers from conventional cigarettes.

Japan has been a bellwether for the industry -- both because of the country's still-large smoking population and its recent, fast embrace of smoking alternatives.

Philip Morris launched IQOS there in 2016, and its performance has been closely watched by investors and public-health researchers as a test case for how so-called reduced-risk products could catch on with consumers.

Smoking rates in the country have plummeted after IQOS's introduction. Japan Tobacco Inc., Japan's biggest cigarette company and a proxy for the market, said sales fell 14.5% in March, in line with declines in February and January attributed to smokers turning to smoking alternatives, like IQOS. The shortfalls were even sharper this time last year and analysts had hoped to see less grim results.

Instead, "cigarette sales are falling at a rate never before seen in a major market," said David Sweanor, chair of the advisory board of the Centre for Health Law, Policy & Ethics at the University of Ottawa.

IQOS has captured 16% of the Japanese tobacco market -- and Philip Morris has pointed to that success as an indication of what could be achieved elsewhere.

Mr. King, the company's finance chief, warned of a maturing market in Japan, saying Philip Morris had run through early adopters quicker than expected and must win over "the more-conservative consumers, especially the age 50-plus smoker segment, which represents approximately 40% of the total adult smoker population."

He added: "We are therefore adjusting our commercial plans in terms of the timing, intensity and content of communication to specifically address the needs of these adult smokers."

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

April 20, 2018 02:47 ET (06:47 GMT)

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