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Is Philip Morris About to Be Crippled by This Smoking Ban?

By Rich Duprey – Updated Oct 19, 2016 at 4:51PM

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It's one of the tobacco giant's biggest markets, but its influence is about to be greatly diminished.

A new public smoking ban is about to go into effect in the Philippines, where tobacco giant Philip Morris owns nearly three-quarters of the market. Image source: Getty Images.

There are few cigarette markets that Philip Morris International (PM 0.53%) owns a greater share of than the Philippines, where it owned nearly three-quarters of the total in 2015. Of the island's 93 million people, some 17 million adults, or 28% of the population, smoke.

Dominance of global proportions

In contrast, less than 17% of U.S. adults smoke, down from over 20% in 2005. While male smokers in the Philippines represent less than 15% of the total population, they account for more than 80% of all smokers. And when they light up, they overwhelmingly choose a Philip Morris cigarette. Local brand Fortune possesses a 31% market share in the Philippines, followed by Marlboro at 21%.

Data source: Philip Morris International 10-K filing. Chart by author.

The tobacco giant only ships more cigarettes to Indonesia and Russia than it does to the Philippines, and only in Argentina do its cigarettes have a greater share of the market. So it's hard to underestimate the importance the Philippines plays in Philip Morris's operations, that is why the plan by President Rodrigo Duterte to ban smoking in all public places represents a big risk to the cigarette maker.

A new, expansive definition

Similar to the ban he imposed on smoking when he was mayor of Davao, where a violator could be fined $100 or four months in jail for breaking the law, Duterte's new national anti-smoking rules would expand the definition of what a public place is -- extending it to parks, buses, and other public vehicles. Any designated smoking area would also have to be at least 33 feet away from a building, while indoor zones would be eliminated. Moreover, the ban will also include electronic cigarettes and personal vaping devices.

The last point could be critical to Philip Morris. While the Philippines represents a huge market for shipments, it only accounts for around 2% of the tobacco giant's profits. Yet the tobacco company has invested heavily in alternative products for smokers, and is beginning a campaign to roll out its iQOS e-cig. It's investing $100 million this year, but plans to spend $1.5 billion on such products next year -- which Philip Morris estimates will add $1.2 billion to earnings by 2020.

Image source: Getty Images.

Quickly catching fire

It was recently reported that, since their introduction in Japan this past April, the iQOS has captured 3% of the market, leading it to roll out these so-called "reduced-risk products" to 35 countries in 2017.

In partnership with Altria (MO 1.17%), Philip Morris is commercializing the iQOS device as Marlboro HeatSticks to capitalize on that brand's global popularity. As noted, Marlboro accounts for one out of every five cigarettes the tobacco company sells in the Philippines, and Philip Morris plans to boost HeatSticks production next year to 35 billion units with as many as 50 billion produced in 2018.

Cost of socializing medicine

Public health experts estimate smoking costs the Philippines $4 billion annually in health costs and lost productivity, which is why including e-cigs and the like in the smoking ban seems as though it's an overly broad policy. While anti-smoking activists have sought to stub out the e-cig industry here in the U.S., European public health advocates have acknowledged the role e-cigs can play in helping to reduce the incidence of smoking, and thus its costs to society.

As the leading player in cigarettes and electronic smoking devices, Philip Morris will likely have the most to lose from smoking bans like this.

Of course, Duterte is proving himself to be something of a loose cannon since his election, with policies against drug traffickers and dealers that have earned the enmity of human rights organizations worldwide. That he's now coming after smokers with the same zeal, if not quite the same death-dealing attitude, could kill off the nascent e-cig industry, and damage Philip Morris's position.

It might not cripple the company's profitability, but it may entice other countries to follow suit. It also suggests that, with possible new tax hikes also being planned, this key Asian market could become just an ash heap for Philip Morris and the industry.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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