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Can Philip Morris International Beat This E-Cig Upstart?

By Rich Duprey - Dec 27, 2017 at 3:15PM

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The global tobacco giant may have a harder time competing against the market leader than previously expected.

Philip Morris International (PM -1.75%) is hoping to bring its next-generation iQOS electronic cigarette to market next year, with or without a reduced-risk label attached. If the company can secure the FDA's approval to say its e-cig is safer than traditional cigarettes -- when others can't advertise a similar claim -- it would give Philip Morris a significant competitive advantage, that's not the iQOS's only selling point.

The real tobacco heat-not-burn technology it uses is generally considered by smokers to be an improvement over traditional e-cigs, which vaporize a liquid to deliver nicotine to the user. So, regardless of whether Philip Morris gets the "healthier alternative" imprimatur from the regulatory agency when the iQOS arrives in the U.S., it is expected to achieve a substantial land grab in market share.

JUUL e-cig plugged into laptop

Image source: Juul Labs.

One thing may stand in the way of the iQOS success is the Juul Labs electronic cigarette. Because the JUUL device uses a completely different technology than traditional e-cigs or the iQOS, one that has proven extremely popular and catapulted it to the forefront ahead of previous market leader Vuse from British American Tobacco's (NASDAQOTH: BATMF) Reynolds American division.

Salting the earth

Although the JUUL uses e-liquids in its pods, the type of nicotine they contain is different from that used by other e-cigs, which is likely why it's now the leading device on the market. According to Wells Fargo, the JUUL has quickly captured a 40% share of the e-cig market while the Vuse has slipped to just over 24%.

Whereas regular e-liquids contain what is called "freebase" nicotine -- which isn't bonded to other compounds -- the JUUL e-liquid contains nicotine salts, which naturally occur in tobacco leaves and are attached to other organic compounds. 

E-liquid refills for electronic cigarettes

Image source: Getty Images.

Numerous companies make e-liquids with nicotine salts, but typically, liquids with salts dissolved in then require more heat to vaporize and are seen as inefficient because of it. Juul Labs, however, uses a proprietary formulation that was patented by Pax Labs (from which Juul was spun out from earlier this year) that reportedly delivers a nicotine hit virtually identical to that of combustible cigarettes.

The key is the use of benzoic acid. Although the vapor of a freebase solution apparently disperses more nicotine than a salt would, it also makes for a harsher taste. Adding benzoic acid reportedly provides an incredibly smooth taste, which allows the use of e-liquids that contain higher levels of nicotine.

Many roads to one destination 

The differences between these delivery systems are stark, which allows each device to stake out its claim to superiority. Traditional e-cigs tend to be simple, inexpensive devices that allow smokers to make the transition from combustible cigarettes to e-cigs an easy one.

But the lack of tobacco flavor and a chemical aftertaste led many users to migrate back to combustible cigarettes, which is why the Vuse became popular: It draws the vapor through a chamber containing real tobacco,  giving users the flavor they are looking for.

iQOS store in Japan

Image source: Philip Morris International.

Heat-not-burn technology is seen as the next stage in e-cig development, because rather than using e-liquids, these devices heat real tobacco to the point where it creates a vapor that can be inhaled, likewise delivering the flavor users prefer.

It's all about experience

If Philip Morris gets FDA approval for the iQOS -- with or without the reduced-risk label -- it will set up a showdown between the two devices that will likely come down to which one creates an experience closest to smoking.

While a reduced-risk label should give an edge to Philip Morris, many electronic cigarette users already believe e-cigs are safer than combustible cigarettes, even if the manufacturers can't make that claim. And if the experience of using the JUUL is quite similar to smoking, at least from a nicotine-impact perspective, then Philip Morris International may have a high hurdle to get over in its race toward market dominance.

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Stocks Mentioned

Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
PM
$106.18 (-1.75%) $-1.89
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$45.54 (-0.13%) $0.06
British American Tobacco p.l.c. Stock Quote
British American Tobacco p.l.c.
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$44.68 (-0.25%) $0.11

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