Should Altria Be Putting More Money Into Marijuana and Less Into IQOS?

Despite Philip Morris International (PM 2.82%) winning the U.S. Food & Drug Administration (FDA)'s marketing approval and a modified risk label for its IQOS heat-not-burn device, the technology hasn't really gone anywhere.

Altria Group (MO 1.91%), which is in charge of development, marketing, and sale of IQOS in the U.S., has so far only introduced the electronic cigarette into exactly three markets: Atlanta, Richmond, Virginia,  and Charlotte, North Carolina.

There's a slow national rollout, and then there's the glacial pace Altria is moving at to introduce a device that's supposed to lead the country toward a smoke-free, non-combustible cigarette future. 

Although Altria is putting a lot of time and money into the effort, maybe it would do better if it spent that time and money helping to get marijuana legalized.

Image source: Getty Images.

Good things to come

Cronos Group (CRON -1.66%) seems like Altria's forgotten investment. Both IQOS and its diminishing returns investment in e-cig maker JUUL Labs grab far more headlines, but the Canadian pot grower that Altria sank $1.8 billion for a 45% stake in in 2018 has mostly sat on the shelf.

To an extent, it's not Altria's fault. The investment was predicated on the long-term opportunity marijuana presented, as it remains illegal at the federal level. Although Cronos has some $1.3 billion in cash and short-term investments available to it, the U.S. market remains constrained, and of the $11 million it generated in the third quarter, just $1.8 million came from the U.S.

Yet it's also true that Altria could be doing more. Legalizing marijuana nationally has arguably never been more popular with the public, and in the halls of Congress, support is growing. Altria should turn its attention to lobbying for legalization, which would help Cronos build its U.S. business.

Maybe that will occur with a new administration in the White House, but it would be money well spent.

Up in smoke

The JUUL investment is wasting away. The $12.8 billion investment has seen nearly 90% of its value evaporate as regulators attack it and the industry. With IQOS, Philip Morris International has done the heavy lifting on bringing attention to the device, spending some $7.2 billion on its smokeless portfolio since 2008, according to The Wall Street Journal.

And it has little to show for it. Market share in most countries outside of Japan is around 1% or less, and the 21% share it does have in Japan -- the country it introduced IQOS into first -- was gained primarily as a result of most competing e-cig alternatives being effectively banned by the government.

Because e-liquids are regulated like pharmaceuticals, Philip Morris largely had the market to itself, and it quickly tapped out the early movers who switched to e-cigs from combustibles. It's been a harder climb to convince others.

Data source: Philip Morris International SEC filings. Table by author.

Obviously Philip Morris is still growing in most  countries, but it is slow and comes at the expense of first needing to convince smokers to switch, then stay. As electronic cigarettes are just as expensive as traditional cigarettes, or nearly so, it might not be an easy sell. 

But marijuana doesn't have that problem; it sells itself. There isn't nearly the same need for massive marketing budgets to sell pot, other than perhaps to distinguish between brands. In comparison, Philip Morris has spent billions of dollars on IQOS, and the returns have been meager.

Going for the green

Although Canada's experience hasn't been especially encouraging regarding legalization, that has more to do with government bungling of regulation and issuing licenses to authorized dispensaries than in the ability of marijuana growers to sell their goods.

Because of the backlog created by red tape, illegal marijuana is still able to undercut legal weed competition. 

There's no guarantee U.S. regulators wouldn't do the same, and there's also the possibility Altria might not want to taint the marijuana legalization debate with any baggage it might carry into the conversation from its cigarette business, where it remains anathema.

Yet with all the financial support Philip Morris has provided IQOS in markets where it has direct responsibility for its marketing and sale not resulting in meaningful growth, Altria helping marijuana legalization make it over the finish line just might be a better bang for its buck.