British American Tobacco Sues Altria and Philip Morris over IQOS

British American Tobacco (BTI 0.01%) is about two years behind Philip Morris International (PM +0.01%) in getting government approval for its heat-not-burn glo brand of electronic cigarette. But BAT may be able to play catch-up since it sued its rival earlier this month for patent infringement.

The tobacco giant says Philip Morris' IQOS holder (which includes a rechargeable and reusable power unit, a disposable tobacco stick, and a charger) violates its patents.

Because British American has sued Philip Morris through the International Trade Commission (ITC) as well as in federal court, it may be able to block Philip Morris from importing the IQOS device into the U.S.

An IQOS electronic cigarette. Image source: Philip Morris International.

The future of smoking

With sales of traditional cigarettes in a secular decline, tobacco companies are looking to technology to maintain their profits. 

Electronic cigarettes that heat an e-liquid to create a vapor have been a popular alternative for smokers looking to quit, but they have come under increasing scrutiny due to use among teenagers, particularly the device from Juul Labs.

Heat-not-burn (HNB) technology is seen as the next generation of smoking alternatives. The devices heat real tobacco leaves to the point they create a vapor, which is seen as much less harmful because it contains significantly fewer toxic chemicals than when the tobacco leaves are burned.

Philip Morris International was the first to gain widespread use of its IQOS device following its launch in Japan in 2014 and the massive adoption by smokers there. The tobacco company ships more IQOS units to Japan than it does actual cigarettes.

While there were conditions specific to Japan that made for such growth -- including the fact that virtually all other types of electronic cigarettes were effectively banned -- Philip Morris has enjoyed strong sales elsewhere it was introduced, though not nearly on the same scale as Japan.

Following the regulatory maze

The U.S. represents a big growth opportunity, though, as it is the largest cigarette market and the IQOS is the only electronic cigarette approved for sale by the Food and Drug Administration.

Philip Morris was the first to submit a Premarket Tobacco Product Application (PMTA) to the agency in 2016, and it took the regulator three years to approve it. British American Tobacco submitted its own PMTA to the FDA only last year, and other manufacturers have until May 20 to submit theirs or face having their products removed from the market, although the FDA is currently seeking a deadline extension from the courts until September. 

The tobacco giants found the application process, which can cost millions of dollars, to be intricate, voluminous, and time-consuming. That suggests that even with an extension, many manufacturers won't be able to comply.

That might mean Philip Morris International and its IQOS could be the only FDA-approved electronic cigarette, HNB or otherwise, on the market. And that certainly gives British American Tobacco incentive to thwart its rival's advance.

Blocking a competitor

Reuters reports British American sued Philip Morris in the U.S. and before the ITC in Germany. It says the IQOS heating blade technology infringes on patents for its glo HNB device, which it plans to introduce in Germany later this year.

British American spokesman Will Hill told Reuters, "If we win, we may be able to get an ITC exclusion order blocking the importation of IQOS into the U.S. by Philip Morris, unless they agree to take a license to our patents."

Philip Morris began selling the IQOS in the U.S. last year under an agreement with Altria (MO +0.00%), which markets and sells the device under its Marlboro brand. It is currently in just two markets, Atlanta and Richmond, Virginia, though it is scheduled to be introduced into the Charlotte, N.C., market this month, eventually rolling out nationally.

Philip Morris previously sued British American Tobacco in Japan, stating the glo e-cig infringed on IQOS patents. That case is still before Japan's courts, and Reuters says the new lawsuit was in response to that one.

Fighting for the future

Philip Morris International shipped 59.7 billion heated tobacco units in 2019, 44% more than the 41.4 billion units it shipped in 2018. It has spent over $7 billion in the past two years creating cigarette alternatives.

British American Tobacco has also spent billions itself designing reduced-risk products, and said in a statement, "Given the significant investment we have made in developing our products, we simply cannot allow competitors to use our patented innovations and technology in their devices without a license."

Yet the real driving force behind these tobacco companies' competing lawsuits may be the billions in potential future revenue, and control of the lucrative U.S. market, which may soon be devoid of competing products.