Pfizer (NYSE:PFE) recently completed its first clinical test of varenicline, the company's smoking-cessation product, on patients who were unable or unwilling to abruptly quit smoking within a month. Results were good for Pfizer, and the drug met its primary and secondary endpoints. This is great news for Pfizer, but is it going to be bad news for Altria Group (NYSE:MO), Reynolds American (NYSE:RAI), or Philip Morris International (NYSE:PM)?
Not as bad as it seems
Now, I ask is it bad news because Pfizer's stop-smoking Chantix drug, which has been on the market since 2006 and is one of the two ingredients of varenicline, has not had that much success. Granted the drug has been given to 20 million patients and has a 22% success rate, but it also has some pretty dire side effects.
For example, during the past five years, 544 suicides and 1,869 attempted suicides have been reported to the U.S. Food and Drug Administration as "adverse events" in connection with Chantix. In addition, numerous "acts of violence" have been reported, most of which have been described as "inexplicable and unprovoked." So far, 2,700 lawsuits have been filed against Pfizer relating to these side effects, and the company has paid out nearly $300 million in settlements -- around 50% of Chantix's annual sales.
After taking all of that into account, I do not believe that big tobacco is likely to be worried by Chantix. Actually, Altria, Philip Morris, and Reynolds are all working on their own 'reduced-risk' tobacco products, which are likely to be more popular as an aid in the quest to quit smoking rather than a drug with dangerous side effects.
For a start, Philip Morris recently signed an agreement with Altria whereby the two companies will share the technology for electronic cigarettes, or e-cigs, and 'reduced-risk' products under several licensing, supply, and cooperation agreements.
Altria is also set to benefit from Philip Morris' donation of 'reduced-risk' products to the company's arsenal of products for sale within the United States. Reduced-risk products are, according to Philip Morris, products that reduce the risk of tobacco-related illnesses. Altria already has several of these products on the market, such as the company's Verve chewable nicotine product and Denmark, a type of gum containing tobacco.
Internationally, Philip Morris is also working on driving sales of 'low-risk products.' The company recently invested $680 million in a reduced-risk product-manufacturing facility in Italy, ahead of the full commercialization of one of its reduced-risk products in the second half of 2014. According to Philip Morris, once fully operational, the factory's combined annual production capacity is expected to reach 30 billion units by 2016. Commenting on the development of reduced-risk products, management said:"The development and commercialization of reduced-risk products...a potential paradigm shift for the industry, and an important growth opportunity for PMI..."
Reynolds American is also active in the not-tobacco nicotine sector. Reynolds' subsidiary, Niconovum USA, has entered its first lead market in the United States with Zonnic, a nicotine replacement therapy gum, while another subsidiary, R.J. Reynolds Vapor, has introduced electronic cigarette Vuse, which currently has limited distribution.
So overall, Pfizer's attempt to try and profit from smokers trying to kick the habit is a great move. However, it is unlikely that this treatment will ever gain enough support to present a serious threat to big tobacco. Indeed, the side effects of Pfizer's new treatment are more than enough to put many prospective users off, and this is without considering the cost.
For example, within many developing economies, where the number of smokers is still rising, Pfizer's drug may prove too expensive for many. Meanwhile, Altria, Philip Morris, and Reynolds are all working together on 'reduced-risk' products that are more likely to attract customers who are trying to quit smoking thanks to their lower cost and lack of nasty side effects.
Fool contributor Rupert Hargreaves owns shares of Altria Group. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.