IQOS and the Global Market

As one of the leaders in global Heat-Not-Burn sales, IQOS, owned by Philip Morris International, is increasingly gaining notoriety both within the HnB community and beyond. While there is sufficient literature concerning IQOS product quality and consumer satisfaction, users and those considering investment should also be informed of how the brand is performing on the global market.

Reception and Market Value

Upon its initial release IQOS received positive reviews, particularly in Japan where the device was made available nationally, unlike most other countries where its availability is largely concentrated in key cities. The device was particularly popular with young consumers so much so that many retail outlets in Japan had to limit the number of items purchased per customer. Following the initial frenzy however, sales began to drop, largely due to the availability of less costly competitor alternatives, such as Ploom Tech devices which retail at approximately half the cost of any given IQOS device. In response, PMI has worked on consistently developing new and updated versions of the device which address consumer critiques and provide features that are not yet available with other brands.

New IQOS versions generally perform well upon release in all countries. IQOS 3 and IQOS 3 Multi generated $823 million of revenue in the third quarter of 2018’s fiscal year, thus generating 11% of the company’s total revenue for the fiscal year. As a company, PMI’s shares are down 17% in the 2018 fiscal year, but have risen 3.5% in the third quarter with the release of IQOS 3 and IQOS 3 Multi. If sales continue at current levels PMI will close the 2018 fiscal year outperforming Wall Street analysts’ predictions for the company.

This is an impressive feat for PMI, as tobacco companies consistently face barriers which can negatively affect the companies’ market value. Anti-Smoking campaigns, advertisement bans, health warnings, and national and state taxes all contribute to the general decline in smoking and thus demand for shares. When assessing the market value of PMI investors should consider that a large portion of the company is still connected to traditional smoking and therefore if PMI, as a whole, loses value it may not be a direct reflection of IQOS’ value.

Overall, IQOS has been successful in its current markets. In Japan, IQOS products comprised 15.5% of all tobacco market sales, a 3.9% increase from the previous year. Similarly in Korea, IQOS sales saw a 4.9% increase in sales in 2018. In addition, there has been significant growth in PMI’s market heated tobacco sales volume, reaching approximately 44 to 45 billion units in 2018. As of July, 2018, PMI reported that 5.6 million smokers worldwide had begun choosing IQOS devices over traditional cigarettes. These statistics, the company has stated, are an indication that the tobacco industry has changed. In late 2018, PMI launched their ‘Smoke-Free Future‘ campaign which promotes smoking alternatives, such as IQOS.

The Future of IQOS

*Please note that as of April 30, 2019, IQOS was approved by the FDA for sale in the United States. To read more about this development click here.*

There are several remaining obstacles PMI faces in its campaign for a smoke-free future, one of the most important being IQOS’ pending US Food and Drug Administration (FDA) approval. Since the release of IQOS PMI’s American branch, Philip Morris USA under their parent company, Altria Group Inc. (Altria), has applied twice to the FDA; firstly, with the claim that IQOS is a safer alternative to traditional cigarettes in that it poses less of a risk of tobacco related diseases, and secondly, with the hopes of gaining FDA approval for sale of IQOS HnB products in the United States.

At the beginning of 2018, the FDA Tobacco Scientific Advisory Committee unanimously rejected PMI’s application concerning the products’ safety in relation to traditional cigarettes, however the second application, applying for right of sale, is still under review. The imminent FDA ruling will affect both the PMI, Altria, and IQOS’ market values. If the FDA rules in favor of PMI and Altria, the number of markets which IQOS is available within will increase, which will likely grow sales revenue. If the FDA denies the application it will likely decrease both product and company value, as failure to gain FDA support would generate investor uncertainty. Following the December, 2017 FDA statement which asserted that IQOS, despite reducing health risks, was still harmful to consumers, both PMI and Altria Group Inc. stocks fell, which, primarily, lead to PMI’s poor performance in the first and second quarters of the 2018 fiscal year.

Nevertheless, PMI is continually investing in its vision for a smoke-free future. In 2014 PMI built a €500 million (then $680 million) new factory near Bologna, Italy, to produce the tobacco components of its HnB products. At the same time, the company has invested $2 billion in its reduced-risk product (RRP) portfolio over the past decade. IQOS appears to deliver on its promise to reduce output of harmful and potentially harmful constituents (HPHCs). According to comprehensive studies carried out by a 300-strong scientific team dedicated to PMI’s novel product portfolio, the aerosol generated by IQOS contains on average 90 percent less of all classes of HPHCs compared with the smoke of the standard reference cigarette. Further studies showed that the product does not negatively affect indoor air quality.

No one can be certain of what role IQOS will fulfil within the Heat-Not-Burn industry, but these figures indicate that PMI believes, and is willing to invest in its vision for a smoke-free future. Both consumers and investors will have to decide a course of action based upon their own beliefs. Don’t forget that you can always check on how PMI is doing by visiting the ‘Investor Relations’ section of their website.

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