Philip Morris International's (PM -0.27%) big bet on a smoke-free future was dealt a serious setback by an FDA advisory panel that unanimously declared last week that the tobacco giant had not proved its case that its heat-not-burn iQOS electronic cigarette was a safer alternative for smokers than combustible cigarettes.

Although it agreed the device did reduce the amount of harmful chemicals smokers were introduced to, the panel wasn't ready to make the leap that it therefore reduced harm. One of the advisory panel members in a statement before the committee met said, "[I]t suggests, it implies. I could not say under oath that what we've seen demonstrates."

Philip Morris International's iQOS heated tobacco device

Image source: Philip Morris International.

The outcome was not unexpected. In an FDA-commissioned study released days before the advisory group met to decide iQOS' fate, the National Academies of Sciences, Engineering, and Medicine also said that e-cigs are a safer alternative than traditional combustibles and can be useful in helping people quit smoking, but they couldn't be deemed "safe." It also said e-cigs encourage non-smoking teens to begin smoking.

Although Philip Morris subsequently told Bloomberg that it was prepared to respond to the "valid questions" the panel raised at the hearing, it had to have been a crushing blow nonetheless, and it calls into question whether British American Tobacco (BTI -0.33%) will submit a reduced-risk application for its competing iFuse glo heat-not-burn device. It has said it was preparing an application to file this year.

Hope springs eternal

Yet it's assuredly not a fatal blow for Philip Morris International or its iQOS device. First, the FDA itself doesn't have to follow the recommendation of the advisory panel, though it usually does, and the denial of a reduced-risk label doesn't mean it still won't be approved for sale to the public. It would just end up going to market like every other electronic cigarette.

Of course, the reduced-risk label would give the iQOS a competitive advantage over its rivals. Being able to say it's safer than competing products would entice smokers who might otherwise be reluctant to try the device because of concerns about risks. If the FDA denies it the "safer" label, Philip Morris will have to fight for market share on the basis of its technology.

JUUL e-cig device plugged into laptop USB port

Image source: Juul Labs.

The current market leader is the JUUL, a different kind of electronic cigarette from Juul Labs that uses nicotine salts in its e-liquids rather than so-called "freebase" nicotine. Looking more like a thumb drive than an e-cig, the JUUL has captured some 40% of the e-cig market, according to Wells Fargo, as the previous market leader, Vuse, from Reynolds American fades.

On one hand, that makes Philip Morris International's task more difficult, though as a global tobacco giant, and in partnership with Altria (MO 0.47%), which would market the iQOS in the U.S. under its Marlboro brand as Heat Sticks, it has the financial wherewithal to overcome the deficit.

But it also means e-cig users are willing to try new technology, and the iQOS (and British American's iFuse glo) does raise the bar in that realm with its heat-not-burn capabilities. Rather than burning tobacco to create smoke and deliver nicotine to the smoker, the iQOS heats tobacco leaf to the point where it creates a vapor, and it's that vapor the user inhales, deliveing the nicotine. It also has the advantage of using real tobacco, not a liquid, which provides the taste and satisfaction people looking to switch from smoking cigarettes seek.

Out of step

In contrast to the U.S., other countries have virtually openly embraced the advent of electronic cigarettes, recognizing they're an important tool in helping smokers quit the smoking habit. The iQOS device is already the dominant reduced-risk product in Japan and may soon even surpass combustible cigarettes. The U.K. is also supportive of the proliferation of electronic cigarettes, with the advisory body Public Health England agreeing there's a 95% chance e-cigs are safer than regular cigarettes based on the available scientific evidence.

So far the FDA has largely chosen to stick to its hardline stance of saying any form of smoking is no good, though Commissioner Scott Gottlieb has softened the agency's position a bit and delayed implementation of its draconian regulations for the industry for several more years. It seems doubtful, though, that will translate into an FDA approval of the iQOS for a reduced-risk label, meaning Philip Morris International won't have any special marketplace advantages.