Altria (MO -0.02%) just handily beat analysts' earnings expectations, but did the tobacco company's main growth driver just get stubbed out?

The IQOS heated tobacco electronic cigarette is embroiled in a patent infringement case that Philip Morris International (NYSE: PM) just lost, which is leading Altria to put its planned national rollout of the device on hold. Because e-cigs are likely where the future of smoking is heading internationally, Altria may find its own growth ambitions in ashes.

Person looking to the left with a trench coat holding a blue electronic cigarette to their lips.

Image Source: Getty Images.

E-cig competition heats up

Philip Morris International, which is essentially the international arm of Altria after the two separated in 2008, is the worldwide leader in electronic cigarettes. The IQOS is ​​available in 64 countries including the U.S., and it has a leading market share in many of those countries. In Japan, where it has been available for sale the longest, IQOS owns over 20% of the combined cigarette and heated tobacco market.

British American Tobacco (NYSE: BTI) is trying to unseat its rival in a number of markets, but it's no Johnny-come-lately to e-cigs. In fact, its Reynolds American division was an industry pioneer, introducing heat-not-burn technology as far back as the early 1990s with its Eclipse brand of electronic cigarette. But there is something to being ahead of one's time and the market was not ready to accept e-cigs as a viable alternative back then.

However, British American invested billions of dollars in reduced-risk products like its glo brand of heated tobacco and Vuse e-cigs, and in its own recent earnings report said e-cig revenue surged 59% over the first six months of 2021, with its glo brand rising 38% year over year.

glo heated tobacco device separated into component parts.

Image source: British American Tobacco.

Patent violation accusations

E-cigs and heat-not-burn devices are really different technologies. The former heats up a liquid that produces a vapor allowing users to inhale nicotine, while the latter heats up actual tobacco to the point where it vaporizes, but doesn't burn. 

British American says Philip Morris International's IQOS violates its patents over the device's heating blade, the ceramic piece that heats the tobacco stick to 350 degrees Fahrenheit and monitors the temperature to keep it from burning. It alleges Philip Morris is using an earlier version of the current technology it uses in the glo device. 

British American sued the IQOS maker last year before the International Trade Commission and in federal court in Virginia. British American was seeking to have an import ban into the U.S. imposed on the IQOS unless Philip Morris International licenses the technology from it. 

An administrative law judge at the U.S. ITC initially upheld British American's patents, but Philip Morris International was able to convince the agency to review part of the judge's findings. This investigation should wrap up by September 15th.

In its quarterly earnings report, Altria said its Philip Morris USA subsidiary will delay further expansion of IQOS in the U.S. as a result of the decision.

Person vaping.

Image source: Getty Images.

A protracted battle

Through a series of agreements signed with Philip Morris International, Altria and the global tobacco giant partnered on research and development of reduced-risk products, one of which was IQOS. Altria was given responsibility for the manufacture, distribution, and sale of the IQOS in the U.S. while PMI was responsible for the rest of the world.

Altria, though, has been moving at a glacial pace in rolling out the device domestically, only introducing it in a handful of select markets to date. It expected to take the device national later this year, but that is now on hold due to the continuing patent battle.

The U.S. trade representative still has to sign off on the decision and the federal court case is separate from the trade ruling. Philip Morris International also says British American's patents are being reviewed by the U.S. Patent and Trademark Office.

Still, this is a big setback for the e-cig manufacturer and for Altria, which killed its own e-cig technology as it bet on Juul Labs and the IQOS. With Juul in a tailspin and IQOS now on hold, Altria's immediate growth plans may go up in smoke.