Philip Morris looks beyond cigarettes with alternative products

November 30, 2016 2:48 AM EST

Packs of Marlboro cigarettes are displayed for sale at a convenience store in Somerville, Massachusetts July 17, 2014. REUTERS/Brian Snyder


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By Martinne Geller

LONDON (Reuters) - Philip Morris International (NYSE: PM), the world's largest international tobacco company, said it could eventually stub out cigarette sales as it launched an alternative product in Britain on Wednesday.

Underlining the regulatory pressures facing the tobacco industry, a British court also on Wednesday rejected an appeal against new rules prohibiting the use of marketing such as logos or colors on cigarette packs.

The British government's victory could spur other countries to follow suit, highlighting the need for tobacco companies to develop alternatives to cigarettes to respond to health concerns that are leading more people to quit a habit responsible for an estimated 6 million deaths a year.

Executives from Philip Morris, which sells Marlboros everywhere except the United States, said their ultimate goal was to phase out cigarettes.

"We certainly see a future where Philip Morris no longer will be selling cigarettes in the market," Martin Inkster, managing director of Philip Morris UK and Ireland, told Reuters.

He said that would take many years and require the help of governments and regulators. Philip Morris still produces more than 870 billion cigarettes each year.

Philip Morris, along with British American Tobacco (NYSE: BATS), Japan Tobacco International <2914.T> and Imperial Brands (NYSE: IMB), mounted a legal challenge to Britain's plain packaging law that was shot down by a High Court in May.

Philip Morris did not join in the appeal brought by the other three, saying it preferred to focus on lower-risk products such as IQOS. It has not explained the origin of the name, but some observers have dubbed it "I Quit Ordinary Smoking".

NEW ALTERNATIVES TO CIGARETTES

The company said IQOS, the result of a decade of research and $3 billion of investment, was a step toward a smokeless future.

The device, already on sale in over a dozen markets including Japan, Switzerland and Italy, electronically heats tobacco enough to produce a vapor without burning it. The company says the vapor has less than 10 percent of the amount of harmful chemicals found in cigarette smoke.

It plans to have IQOS in 20 markets by the end of this year, and as many as 35 by the end of next year. In the UK, it will cost 45 pounds ($56.14), with a single pack of 20 tobacco sticks, called HEETS, costing 8 pounds ($9.98).

The UK is poised to be a big test for IQOS, since its e-cigarette market is more developed than several of IQOS's other markets.

Japan Tobacco and BAT (NYSE: BATS) are testing their own tobacco-based products and are pushing hard to catch up to Philip Morris in delivering products that fill the space where the current generation of e-cigarettes -- which use nicotine-laced liquid -- fail.

BAT, which is in talks to buy Reynolds American (NYSE: RAI) for more than $47 billion, has spent about $700 million over the past five years to develop next-generation products.

Its line-up is more diverse than those of its peers, including the "glo" tobacco device, various Vype e-cigarettes and an inhaler called Voke certified as a medical product.

"Different segments of consumers will prefer different products," David O'Reilly, BAT's group scientific and R&D director, told Reuters earlier this month. "That's why we have a multi-category approach."

With e-cigarettes he said nicotine is not immediately absorbed by the lungs as it is with smoking, so the chemical satisfaction is delayed. But "heat not burn" products deliver a quicker and more authentic hit.

PMI and BAT both have various other products in development.

PMI is working on a tobacco stick that uses a carbon tip as a heat source to generate vapor, in a product that is even closer to a traditional cigarette as the whole thing can be thrown away after use. That technology is similar to one owned by Reynolds, which BAT would acquire if its planned acquisition goes through. BAT is also working on technology whereby an e-cigarette could deliver an immediate nicotine hit, like tobacco, that smokers may find more satisfying.

Imperial Brands (NYSE: IMB), the fourth-largest tobacco company, has so far stuck with e-cigarettes, which are also widely sold by independent start-ups.

Health campaigners remained cautious.

"If smokers switch to electronic cigarettes or other products that can be shown to cut the risks to their health, this could lead to a big improvement in public health," said Deborah Arnott, chief executive of UK health charity Action on Smoking and Health (ASH).

"But we need independent evidence to support any claims made by the tobacco industry."

ASH said that until independent evidence shows that IQOS and similar products are substantially less harmful than smoking, they should be regulated in the same way as cigarettes.

($1 = 0.8016 pounds)

(Reporting by Martinne Geller in London; Editing by Keith Weir and Alexandra Hudson)



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