Tobacco giants Philip Morris International (NYSE:PM) and Altria Group (NYSE:MO) have enjoyed huge profits from their traditional cigarette businesses for decades. But recently, both Altria and Philip Morris have seen the opportunity to diversify into reduced-risk products, and both companies have worked hard at building up a presence in the new, fast-growing industry.
One of Philip Morris' most promising products has been iQOS, its heated-tobacco system that seeks to replicate a traditional smoking experience with reduced health risks. After having applied for consideration from the U.S. Food and Drug Administration as a "modified risk tobacco product" (MRTP) late last year, Philip Morris got the good news this week that the FDA had decided to initiate a substantive scientific review process. Although the process could be long, the FDA decision has huge positive implications for Philip Morris and Altria.
How we got to where we are
Philip Morris has made two submissions to the FDA with respect to iQOS. In early December, the company submitted its MRTP application. Then, at the end of March, Philip Morris followed up with a premarket tobacco product application to the FDA.
This second application set the stage for Philip Morris to commercialize and market the heated-tobacco system in the U.S. That's where Altria steps in, because it has made an agreement with Philip Morris under which Altria will have exclusive rights to market iQOS domestically.
What just happened
On May 24, the FDA published an executive summary and research summaries in support of the initial Philip Morris MRTP application. The executive summary is more than 200 pages long, putting forth Philip Morris' case for its claims that switching to iQOS can reduce risks of tobacco-related disease, present a lower risk of harm compared to continuing to smoke cigarettes, and reduce exposure to harmful chemicals. Meanwhile, the research summaries are voluminous enough to take up 75 megabytes, even in a zip file, and further information is expected to get released on a regular basis.
Philip Morris responded favorably to the news. As company executive Dr. Moira Gilchrist said, "We welcome FDA and public review of the comprehensive scientific evidence package that we submitted to the agency through its MRTP application process." Philip Morris is convinced that it can develop lower-risk options that will help smokers and ultimately replace conventional cigarettes.
Altria also had positive comments to make regarding the FDA move. As company executive Sarah Knakmuhs said, "We are excited about the opportunity to add this product to our portfolio for adult tobacco consumers who are looking for an alternative to conventional cigarettes," referring to the U.S. commercialization plans that Altria is actively working on in case the FDA eventually approves iQOS.
What should investors expect?
Philip Morris noted that the FDA has established a one-year timetable for review applications under the MRTP framework. However, the company did recognize that the timing standard doesn't bind the FDA to a firm deadline. Given the size of the submission that Philip Morris provided, it's reasonable to think that the process could potentially go well beyond a single year.
Still, the move opens the door to public comment and reaction from interested parties. On one hand, seeing how the scientific community responds to Philip Morris' research will be eye-opening. At the same time, investors can expect consumer groups to lobby against iQOS, even though it could arguably reduce the risk to users compared to regular smoking.
In the meantime, Philip Morris and Altria will keep moving forward with their respective reduced-risk campaigns. Philip Morris has already seen huge success with iQOS in Japan and plans to keep rolling out the platform elsewhere across the globe. For Altria, efforts with its MarkTen line of e-cigarettes have been encouraging. Both companies are working together on technology to keep innovating in the reduced-risk arena.
The FDA's recent move is just the first step in a long process, but investors in Philip Morris and Altria are hopeful for an eventual positive outcome. If that happens, then the size of the market for iQOS could expand dramatically, and that in turn could help drive a move away from regular cigarettes toward the reduced-risk side of the spectrum.