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International Pressure Threatens Philip Morris

By Dan Caplinger – Feb 22, 2018 at 2:21PM

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Regulatory restrictions and pushback from health advocates are constant potential problems for the tobacco giant.

Philip Morris International (PM -4.18%) is one of the world's most successful tobacco companies, with a long history of selling cigarettes throughout Europe, Asia, and Latin America even before it became an independent company with its own separately traded stock. Initially, one justification given for spinning it off was that it separated the international business from the parent company's exposure to the U.S. market, which was stricter in terms of regulation.

Over time, though, regulators and governments around the world have learned from each other. Today, the globally-focused PMI faces many of the same potential difficulties that its U.S.-centric counterparts have dealt with all along. Even as the company aims to shift its focus toward what it calls reduced-risk products, a couple of news items show the level of risk that Philip Morris still faces as it seeks to survive and grow in an increasingly uncertain future for tobacco.

Two hands holding iQOS heated tobacco device.

Image source: Philip Morris International.

Bad news from Lithuania

A news report earlier this week said that Lithuanian agency in charge of tobacco regulation now suspects that Philip Morris violated the Eastern European nation's advertising laws. According to the report, Lithuanian authorities conducted a six-month investigation into whether the company's iQOS heated tobacco system met the definition of a tobacco product.

Philip Morris International argued that the iQOS should be treated for marketing purposes as an electronic product, in which case, ads for it wouldn't be subject to the restrictions placed on tobacco advertisements. But regulators noted that iQOS can only be used in conjunction with the Heets tobacco packets that enable users to inhale vapor produced from heated tobacco.

Philip Morris advertises the iQOS extensively throughout Europe, and even though the fine for breaking the rules in this case would be extremely small, having to revamp its marketing campaign would be a big blow to the company. Even bigger is the concern is that other regulators might follow Lithuania's lead, potentially putting a huge obstacle in the way of the iQOS's growth in the European market after its large successes in Japan. Philip Morris will challenge any adverse regulatory findings, but it will have to wait a month or so to learn what those findings are.

A small victory in the Netherlands

Philip Morris got better news when Dutch prosecutors agreed not to open a criminal investigation against it and three other major cigarette companies -- British American Tobacco, Japan Tobacco, and the Imperial Tobacco Benelux unit of Imperial Brands. A lawyer for anti-smoking groups in the Netherlands had asserted the companies should be charged with attempted murder or manslaughter, using arguments similar to the ones that U.S. plaintiffs' attorneys have made throughout the history of tobacco litigation. Allegations specifically included the knowing sale of addictive tobacco products, as well as misleading the public about the various harmful chemicals delivered by cigarettes.

Prosecutors chose not to bring charges because smokers now have knowledge about the risks inherent in cigarette smoking, yet choose to smoke anyway. Despite the difficulties involved in quitting smoking, prosecutors said that their chances of success in a criminal case of this type were low because of the difficulty of proving legal causation. Philip Morris welcomed the decision, arguing that supporting alternatives to traditional cigarettes such as iQOS is the better way to address health risks from regular smoking. Yet anti-smoking advocacy groups are looking at filing similar cases in other countries where the legal systems potentially provide a greater chance of victory.

Dealing with risk

The financial risks involved in selling cigarettes and other tobacco products are nothing new for Philip Morris International, and even with its development of what the industry describes as reduced-risk products, it knows it will continue to face difficult situations like these. That won't stop the tobacco giant from moving forward with iQOS development and marketing, but it's an issue that shareholders need to understand and factor into their investment decisions.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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