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Philip Morris International Gets a Big Win Down Under

By Dan Caplinger – Apr 9, 2018 at 7:25AM

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Find out what it means for the tobacco giant's heated-tobacco plans.

Philip Morris International (PM -0.56%) is undergoing a massive transformation as it seeks to find ways to replace its popular traditional tobacco cigarettes with alternative products that have fewer potential negative health impacts. The effort has been extensive, with years devoted to working on reduced-risk products that can match the experience that smokers want without the same level of exposure to harmful chemicals and other potential problems.

Recently, Philip Morris' efforts in the reduced-risk arena have centered on the iQOS heated tobacco system. By taking specially formulated tobacco and putting it into a device that heats it up without causing it to catch on fire, iQOS delivers a vapor that matches up well with consumers' expectations of a tobacco-based product. Yet even though Philip Morris has done scientific studies to validate claims of less deleterious health effects, not all regulators agree. That led to a court dispute in New Zealand, but its recent adjudication gave Philip Morris a positive outcome that it will be able to use not just in the Pacific nation but potentially in other jurisdictions as well.

iQOS device on a glass table with caption This Changes Everything.

Image source: Philip Morris International.

What New Zealand said about iQOS

Philip Morris launched iQOS in New Zealand earlier this year, and the nation's Ministry of Health reacted quickly to the rollout. After having said that it was in talks with Philip Morris about iQOS, the ministry later argued that although the iQOS device itself is legal, the Heets tobacco sticks are illegal.

The somewhat surprising rationale that the Ministry of Health produced was that because iQOS only heats the tobacco rather than burning it, alleging that this trait puts the tobacco sticks into the category of products designed for oral use other than smoking. This would potentially run afoul of the Smoke-Free Environments Act, which regulates tobacco use in New Zealand and distinguished combustible tobacco from other forms of the product.

Philip Morris responded by turning to the intent of the act. Initially, the 1990s-era law was intended to separate chewing tobacco from cigarettes, creating different regulatory frameworks for the two products. A spokesperson argued that the law has nothing to do with more modern cigarette alternatives like e-cigarettes or heated tobacco products.

A win for Philip Morris

Late last month, a court in Wellington heard arguments about the case between Philip Morris and the Ministry of Health. The court chose to dismiss the health ministry's action, allowing Philip Morris to market iQOS in New Zealand freely.

The result wasn't entirely surprising. Even the prosecutor for the Ministry of Health was willing to admit that the case hinged on how nitpicky the court wanted to get about the definition of "smoking." The health ministry's argument that ignition was a prerequisite for smoking is perhaps consistent with the scientific definition of the term, but the court instead focused on practical considerations.

Nevertheless, Philip Morris said there's more work to do. "We welcome the Court's decision," a spokesperson for the company said, but "this case does, however, highlight the need for urgent reform of regulations surrounding e-cigarettes and other smokeless tobacco products."

A sign of things to come?

The experience that Philip Morris went through in New Zealand is likely to come up in other jurisdictions across the globe. As countries wrestle with how they want to regulate iQOS and other alternatives to regular cigarettes, Philip Morris will want to collect favorable verdicts and cite them as reasons for other government regulators to follow the same path. In that line, New Zealand's court ruling will be helpful for the tobacco giant.

The bigger challenge for Philip Morris will be to navigate processes to get approval in key countries. For instance, the modified-risk tobacco product application process in the U.S. will likely require Philip Morris to show demonstrated reductions in adverse health effects from iQOS compared to regular cigarettes. That's a tough threshold to pass. But by working its way into countries like New Zealand at least for initial trials, Philip Morris can start collecting the evidence it will need to support its applications in other markets around the world.

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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