The U.S. International Trade Commission recently ruled Philip Morris International's (NYSE: PM) IQOS heated tobacco device violates two patents held by rival British American Tobacco (NYSE: BTI) and that the electronic cigarettes can't be imported or sold in the U.S.

While the ruling is obviously a major blow to the tobacco giant because the U.S. is potentially the world's biggest, most lucrative market for e-cigs and IQOS is so far the only e-cig that has earned a modified-risk label from the Food and Drug Administration, the decision is a devastating blow to Philip Morris partner Altria (MO 0.20%) because it has no vapor products to fall back on and no other markets it can sell into. The question is whether it's fatal.

A couple holding an IQOS device

Image source: Philip Morris International.

A missed opportunity

Philip Morris is ramping up the introduction of IQOS into numerous countries around the globe. While the device hasn't gained the same kind of traction in European Union countries and Latin America that it did when first introduced into Japan, which has a unique market unlike virtually any other, IQOS is still making significant inroads and holds a substantial share.

The U.S., though, was where Philip Morris was looking to make its biggest mark. Through agreements with Altria, which would make the U.S. tobacco company responsible for the manufacture, marketing, and sale of IQOS here, the two were planning to roll out the device nationally later this year.

Although Philip Morris has had FDA marketing approval for two years, Altria took a go-slow approach to introducing the e-cig, and it is in only three markets at the moment. But following a lawsuit by British American and an initial review by the ITC indicating IQOS violated British American's patents, Altria put the national rollout on hold. Now it may have to withdraw the device completely if planned appeals of the ruling are unsuccessful.

A number of irons in the fire

Heated tobacco devices typically include a rechargeable and reusable power unit, a disposable tobacco stick, and a charger. British American alleges -- and the ITC agrees -- that the IQOS violates the patents surrounding the device's heating blade, the ceramic piece that heats the tobacco stick and monitors the temperature to keep it from burning. 

It contends IQOS is using an earlier version of the current technology it developed for its glo device. British American has also filed a similar lawsuit against Philip Morris in Germany.

While losing the U.S. market (or even Germany) would hurt, Philip Morris has numerous other countries in which it can sell IQOS, and it has co-developed a "beyond nicotine" strategy, in which it sees itself generating over half of its total net revenue from smoke-free products by 2025 and at least $1 billion yearly from "beyond nicotine" products.

It's invested in Fertin Pharma, which makes nicotine chewing gum, chewable tablets, lozenges, and "pouch powders" that dissolve quickly in the mouth, as well as Vectura, a British contract development and manufacturing company (CDMO) for the pharmaceutical industry.

Counting on IQOS

Altria, though, doesn't have those same levers, or not the same number. The vast majority of its revenue still comes from traditional cigarettes, and while it also has oral tobacco products, such as chewing tobacco and nicotine pouches, its investments in IQOS and Juul Labs were supposed to be its future. But Juul looks as though it's on its last legs and could be removed from the market.

The FDA has undermined its e-cig to the point that it has lost vast swaths of market share to Vuse, British American's e-cig vapor product. Although Juul still holds the most share at the moment, the FDA is dragging its feet on giving it marketing approval. It was supposed to have decided last month, but it says it needs more time. 

Considering how vociferously the agency has attacked Juul over the past two years for its alleged role in teenage use of e-cigs, the prospects look dim.

A setback, not a death sentence

Yet the ITC ruling is not a fatal blow to Altria. As noted, most of the tobacco giant's revenue comes from cigarettes, and while the industry is in a secular decline, it's nowhere near being snuffed out.

Precisely because it hadn't gotten very far in rolling out IQOS, the device accounts for relatively very little of its revenue. It might have been a potential growth product, but a ban won't upend Altria's finances.

With Altria also still paying a secure and lucrative dividend that currently yields 7.9% annually, it remains a tobacco stock investors can count on.