IQOS: USA launch

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For exclusive coverage on every aspect of the IQOS USA launch, visit our “IQOS US” section.

Feburary 2024

Old Friends x New Foes: As the IQOS US launch gets closer, Philip Morris International and Altria lobbyists are putting up a ferocious fight. In Virginia, where a bill for heated tobacco taxation is going through the legislative process, PMI opposes the proposed bill1 – claiming that it would put them at a competitive disadvantage. Altria supports the Bill although stating that they did not request or ask for it.

The bill classifies IQOS sticks as cigarette (“paper-wrapped sticks of tobacco”) for tax purposes while setting a lower tax rate: 2.25 cents per stick versus 3 cents on a cigarette. If IQOS sticks are not classified as cigarette, some claim that MSA participants could argue that the State is out of compliance and withhold settlement payment ($140Mn in 2023) – which is based on the number of cigarettes sold.

On the other hand, PMI lobbyists disagree with the MSA claim and state that the Bill puts PMI at a competitive disadvantage as Altria is developing a product that heats capsules of tobacco instead of paper-wrapped tobacco sticks.

Feburary 2024

PMI further scales back the initial IQOS launch in the USA. At the 2023 Investor Day (Sept 2023), PMI CEO stated: “so, in 2024, May, when we will start the commercialization of Blade [IQOS 3]…. we will do it in two states, four cities”. At the 2024 CAGNY Conference, PMI disclosed that only one city test is planned in Q2 2024. Moreover, the terminology is clearly modified from “launch” to “city test”.

PMI underlines that ILUMA at-scale launch remains the core focus and ILUMA should offer a faster path to the break-even in the USA when compared to starting with IQOS3 launch at-scale. As noted in our “PMI: FY23 Results” write-up, PMI’s somewhat “reckless” CAPEX/OPEX in Smoke-free and Beyond Nicotine areas has been a source of investor concern. We believe minimizing the commercial investment on an inferior product in a high-cost market is an astute decision.

What will PMI learn from a city test in the USA considering that they have already launched IQOS in 70+ markets (- including IQOS3 launch, through Altria, in multiple metropolitan areas in the USA)? This is up for discussion. However, in any case, we believe “IQOS launch in the USA in 2024” is increasingly turning into a “publicity stunt”.

Feburary 2024

The global patent infringement settlement between BAT and PMI (that resolves all ongoing patent infringement litigation between the parties related to heated tobacco and vapour products) removed a key hurdle for IQOS3 launch in the USA. The settlement comes just three months ahead of the expected US launch date (May 2024).  

October 2023

At the 2023 Investor Day, Philip Morris International defined its “illustrative” IQOS US launch target as 10% of cigarette volume, or 18Bn sticks, 5 years after IQOS ILUMA launch. Based on Altria’s Q3 2023 Earnings release, the US market volume is already down to 165Bn sticks on 12-month rolling basis and is set to close 2023 around 160Bn sticks. Moreover, even assuming a 4.5% annual decline rate (only secular plus pricing-driven decline; almost half the prevailing decline rate), the US cigarette market will be down to 110Bn sticks before IQOS reaches 10% penetration. Thereby, PMI’s “illustrative” 18Bn sticks ambition is 64% overstated vis-a-vis a more sensible projection of 11Bn (note: IQOS launch should not meaningfully change the “de-nicotinization” rate in the market in order for PMI to stay clear off the regulatory troubles). Such a large difference matters in a high profitability, high visibility market like the USA – more than any other market in the world.

October 2023

PMI submitted PMTAs (seeking right to market) and MRTP Applications (seeking reduced exposure claim) to the US FDA for three IQOS ILUMA devices and five TEREA heated tobacco stick variants. PMI has 8 granted marketing orders (PMTA approvals) so far and is applying for 8 new ones (- see the summary below).

It took 718 days on average (from submission to decision) for the US FDA to complete the IQOS PMTA reviews. The only exception is IQOS 3 PMTA, whose review took only 252 days on the basis that changes in the device architecture (vis-à-vis the 2.4 version) was mostly relating to the physical appearance. However, this is not the case for the current submissions as IQOS ILUMA products rely on a fundamentally different heating system and contain numerous technological improvements. Thereby, US FDA review of the current IQOS PMTAs is likely to take 18-24 months (decision in July 2025 – Jan 2026). This explains PMI’s revised guidance on IQOS ILUMA launch timeline: in the second half of the 2024-26 forecast period (i.e. H2 2025 or later). Thereby, IQOS will have a meaningful presence in the USA (i.e. reaching to at least half of the US smoker base) only in 2027 or later (i.e. beyond the 2024-26 forecast period).

Moreover, PMTA process is not the only bottleneck for PMI. We expect:
– BAT to request removal of IQOS 3 from the market (on the basis that IQOS 3 is infringing BAT’s granted patents) as soon as PMI launches IQOS 3 in the USA next year (test market in 2 states). BAT is likely to be successful in this request
– BAT to sue PMI for infringing its patents for induction heating technology as soon as PMI launches IQOS ILUMA
– Altria to sue PMI based on common IP dating back to the pre spin-off period.

As the USA applies a more liberal approach of novelty and inventive step (non-obviousness) in the interpretation of patents, it is more difficult for PMI to invalidate BAT and Altria’s granted US patents. Although our commercial & financial assessment of IQOS US launch is privileged & confidential (- see our proprietary research report on the topic), we can underline the fact that the path to IQOS commercialization in the USA is more treacherous than ever.

September 2023

Philip Morris International (PMI) signaled a slower IQOS US roll-out at the 2023 Investor Day (September 28, 2023) due to the unpredictable IQOS ILUMA PMTA review timeline (- application to be made in October 2023).

PMI confirmed that they will launch IQOS 3 next year in major metropolitan areas in two states. IQOS 3 is the previous generation device with internal blade heating and the earliest launch date possible is May 2024 (- when PMI takes back the IQOS commercialization rights from Altria).

IQOS ILUMA authorization is the prerequisite for the major geographic expansion and commercial investment uplift – as PMI will refrain from investing heavily on the initial launch that will take place with (the old generation) IQOS 3 device. Considering the substantial PMTA backlog at the US FDA (i.e. long review queue & unpredictable timing), PMI now expects to be able to launch IQOS ILUMA only in the second half of 2024-26 forecast period (i.e. H2 2025 or later). Thereby, PMI modifies the timeline for its 10% US market share ambition (i.e. 18Bn sticks => 0.9Bn packs => $7Bn retail value): from 2030 to “five years after ILUMA Launch”.

September 2023

PMI strengthens its lobbying firepower in the USA ahead of the long-awaited IQOS launch. According to an exclusive Reuters’ review2, PMI registered new lobbyists in at least 19 US states this year and plans to add some in four more in the next two weeks. As a result, PMI’s overall lobbying efforts will span states where the vast majority of smokers and the US population reside. Until this year, PMI’s lobbying activities in the USA had been negligible.

State-level lobbying registers reveal that lobbying activity would focus on heated tobacco products in at least three states: Georgia, Colorado and Oregon. Elsewhere, the filings referenced broader topics including tobacco policy, taxation and business, and commerce. Moreover, the publicly available lobbying registries showed that PMI hired more than a dozen firms or individuals, some with high-level connections in states such as Florida, Illinois and Pennsylvania.

References:

  1. Philip Morris Int’l: Tax on cigarette alternative is unfair (richmond.com) ↩︎
  2. https://www.reuters.com/business/retail-consumer/pmi-hires-us-lobbyists-key-iqos-launch-nears-2023-09-27 ↩︎

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