Philip Morris' (PM) IQOS Gets FDA Nod to be Marketed as MRTP

Philip Morris International Inc. PM has been benefiting from focus on reduced risk products or RRPs, especially the IQOS device that has been a major hit. The company’s efforts clearly got a boost with the latest move by the U.S. Food and Drug Administration (FDA). Incidentally, the FDA has approved IQOS’s marketing as a modified risk tobacco product (MRTP).  

The FDA authorized Phillip Morris’ electrically heated tobacco system — IQOS — as an MRTP after ensuring that it heats tobacco and does not burn it. Further, consumers’ shift from conventional cigarettes to IQOS lowers their exposure to injurious or potentially injurious chemicals. Cleary, the FDA’s decision reinforces that the use of IQOS is likely to be beneficial for the overall population’s health.

Notably, IQOS is the first and sole electronic nicotine product, which has been given marketing permits via the FDA’s MRTP process. This is likely to be a big win for Phillip Morris, which generated one-fifth of net revenues from smoke-free products as of the end of 2019. The company’s IQOS, a smokeless cigarette, counts amongst one of the leading RRPs in the industry.

IQOS, which was faring well internationally, was commercialized in the United States through a deal with Altria MO that was approved by the FDA in 2019. Further, Phillip Morris submitted a supplemental premarket tobacco product application (PMTA) with the FDA on Mar 30 for the IQOS 3 tobacco heating device. We note that RRPs formed around 22% of the company’s total revenues in the first quarter of 2020, including about 10% contribution from IQOS devices.

These next-generation devices are backed by substantial scientific insights and research. The company expects such advanced and high-quality products to help adult smokers switch from traditional cigarettes to smoke-free options. In fact, there were 14.6 million total IQOS users as of Mar 31, depicting an increase of more than 4 million adult users from the same period last year. Strong growth in IQOS boosted revenues in the RRPs unit, which increased 25.1% to $1,555 million in the first quarter. Moreover, heated tobacco unit shipment volumes of nearly 16.7 billion units surged 45.5% year over year.

The company expects consistent growth in IQOS and heated tobacco category, and therefore has been committed toward expanding these products. Among other initiatives, Philip Morris announced a partnership with South Korea’s KT&G this January in order to commercialize the latter’s smoke-free products outside the country. This global collaboration aims at expanding the reach of KT&G’s smoke-free products to many other markets. To further propel growth of this category, the company launched ‘The Year of Unsmoke’ in April 2019. The action is aimed at creating a better future for smokers by encouraging them to either quit smoking or shift to low-risk alternatives.

Given these factors, the FDA’s nod to market IQOS as an MRTP appears to be a major highlight, as it has immense potential to make cigarette smokers switch to IQOS and aid revenues. Such strong moves in the RRP space, together with efficient pricing, should help Phillip Morris counter challenges related to soft cigarette volumes.  

Shares of this Zacks Rank #3 (Hold) company have dropped 4% in the past three months compared with the industry’s decline of 0.7%.

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