IQOS USA: Market Potential

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Altria (Philip Morris USA): CAGNY Conference (Feburary 2024)

Altria projects heated tobacco to make up ~5% of the US nicotine space over the long term (against PMI’s aspiration to capture 10% of the cigarette market within 5 years after IQOS ILUMA launch) despite developing a portfolio of heated tobacco products – both internally and through the global partnership with Japan Tobacco. For further details: Heated Tobacco Products.

British American Tobacco (Reynolds American): FY23 Results (Feburary 2024)

Despite submitting MRTP (Modified Risk Tobacco Product) application to the US FDA for the Glo Hyper device in December 2023, BAT states that heated tobacco has limited potential in the US and their focus will continue to be on e-vapor. BAT’s PMTA (Pre-market Tobacco Product Application) for Glo is pending the US FDA since 2021. BAT sees these applications as a precautionary action in case the category’s growth surprises to the upside.

Philip Morris International: 2023 Investor Day (September 2023)

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 made in October 2023). PMI will launch IQOS 3 next year in 4 major metropolitan areas in two states (- later revised to “one metropolitan area in May 2024”). Recall that

– IQOS 3 is the previous generation device with internal blade heating. For further details: IQOS USA: Product Portfolio

– the earliest launch date possible is May 2024 when PMI takes back the IQOS commercialization rights from Altria. For further details: IQOS USA: History.

IQOS ILUMA authorization is defined as 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 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 from 2030 to “five years after ILUMA Launch” and states that the “10%” corresponds to 18Bn sticks (0.9Bn packs) in volume (or, ~$7Bn in retail value).

Attention: Based on Altria’s FY23 Earnings release, the US cigarette market volume is already down to 162.8Bn sticks in 2023. 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. Note that IQOS launch should not meaningfully change the “de-nicotinization” rate (especially, the total combustible & heated “tobacco stick” volume decline rate) in the market in order for PMI to stay clear off the regulatory troubles.

Thereby, PMI’s “illustrative” 18Bn sticks ambition is 64% overstated vis-a-vis a more reasonable estimate of 11Bn (i.e. roughly a quarter of the Japan volume in 2023). An overstatement made regarding to the potential in the USA (a high profitability, high visibility market) matters much more than any other market in the world.

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