Although Philip Morris International (NYSE:PM) may have just had its ambitions for introducing a reduced-risk electronic cigarette stubbed out by an FDA advisory panel, 2017 was a year to remember for the tobacco giant. And that doesn't mean it won't have a great 2018, either.
Smoke gets in your eyes
Philip Morris set the stage for what last year would become when it declared the future would be "smoke free." It then set about laying the groundwork for that to happen. Shipments of reduced-risk products rose to an estimated 20 billion units last year, from 3.7 billion the year before, and were orders of magnitude larger than the 62 million it shipped in 2015.
In Japan, the market where its iQOS heat-not-burn device has been available the longest -- it was first introduced in Nagoya, Japan, in 2014 and has since been rolled out there nationally -- Philip Morris shipped 8.3 billion units in the third quarter, four times the number it shipped in the same period a year ago. But more importantly, it was more than the number of combustible cigarettes shipped in the country.
For the first time, Philip Morris' reduced-risk product was the dominant cigarette brand in a market. Considering the total market in Japan for combustible and reduced-risk products is 44 billion units, the iQOS device alone has an 18% share of the market, and Philip Morris as a whole has a 37% share.
Just say no
The success the tobacco company has enjoyed in Japan is fueling its willingness to expand into numerous other markets, including the U.S., though the anti-smoking sentiment of U.S. regulatory agencies is more stringent than is found elsewhere.
It's created a strange anomaly where the FDA seems to be encouraging people to give up combustible cigarettes by floating the idea of reducing nicotine levels in cigarettes to negligible amounts, which would effectively ban them, but its advisory panel just came out very strongly against letting Philip Morris earn a reduced-risk classification for its iQOS device.
That doesn't mean it won't be allowed to sell them -- and since most people consider electronic cigarettes a healthier alternative to traditional cigarettes, it may benefit anyway. But Philip Morris won't be able to declare they're a safer alternative -- that is, if the FDA follows its advisory panel's advice, which it usually does, though it isn't required to.
Yet Philip Morris International seems sincere in wanting to have people stop smoking combustible cigarettes -- to go smoke-free -- and switch over to e-cigs as an alternative.
School of hard knocks
Last year, Philip Morris established the Foundation for a Smoke-Free World to stamp out smoking and committed to supporting it by investing upwards of $1 billion in the effort. However, rather than welcome the move, anti-smoking activists have criticized the effort. Just last week, 17 schools of public health from the U.S. and Canada, including Harvard and Johns Hopkins University, declared they would not accept any contributions from the foundation. The World Health Organization has also refused to work with it.
Such myopic views haven't stopped Philip Morris from pursuing its aim, as on New Year's Day it took out full-page ads in U.K. newspapers saying it wanted this year to be the year it quits smoking. That goal isn't going to happen overnight, but it does appear the tobacco giant is moving inexorably in that direction.
In fact, the attitude of U.S. health agencies and those of their U.K. counterparts couldn't be further apart. Advisory agency Public Health England has gotten fully on board with electronic cigarettes as a useful tool for quitting smoking, joining with the country's leading vaping association last year to encourage people to quit cigarettes for October, and in January they made e-cigs a focus of their latest campaign. Data now indicates the U.K. has the second lowest smoking rates in Europe and the lowest ever reported locally.
With dominant market share in each of the markets in which its products have been introduced, and with the potential for greater uptake of reduced-risk electronic cigarettes -- whether regulators want to call them that or not -- it's understandable why Philip Morris International was able to crush it in 2017, with its stock gaining more than 15% for the year. An FDA setback might hurt those returns somewhat, but if it gains marketing approval for the iQOS, it could still smoke the competition in the year to come.