In the ever-evolving landscape of tobacco, Philip Morris International (PMI) stands out as a trailblazer in the realm of heated-tobacco products, surpassing industry giants such as Altria (NYSE: MO) and British American Tobacco (NYSE: BTI).
Recent data reveals that in 2023, PMI reaped 36.4% of its adjusted-net revenue from smoke-free products, showcasing a notable uptick from the preceding year’s 32.1%. Notably, the lion’s share of this revenue stream stems from IQOS, PMI’s heat-not-burn product, which boasts a user base of 28.6 million out of a total 33 million smoke-free product users.
Moreover, PMI derived over 40% of its gross profits from smoke-free products, underscoring not just rapid growth but also robust margins in this segment. Now, the spotlight is on PMI as it gears up to introduce its IQOS brand in the United States for the very first time.
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Philip Morris’ Aspirations for IQOS in Texas
A recent Reuters report unveiled Philip Morris International’s plans to launch its IQOS heated-tobacco device in Austin, Texas, highlighting job listings on Linkedin as a precursor to this strategic move.
This launch follows a series of setbacks for IQOS under Altria, who acquired the rights to sell the product in the U.S. in 2019. Despite obtaining Food and Drug Administration (FDA) approval, a subsequent ruling by the U.S. International Trade Commission (ITC) found that IQOS infringed upon two patents held by British American Tobacco.
With the resolution of the patent dispute and the subsequent handover of commercialization rights to PMI in the U.S., scheduled to commence in April 2024, PMI’s acquisition of these rights for $2.7 billion signals a bullish outlook on the product’s prospects in the American market.
PMI now appears primed to leverage the heated-tobacco trend by unveiling its products in four U.S. cities spanning two states this year, with a broader rollout anticipated in 2025.
The regulatory environment in the U.S. has proven to be a treacherous terrain for tobacco companies in recent years. Pockmarked with declining cigarette sales due in part to hefty excise taxes and stringent limitations, the U.S. market has also witnessed regulatory crackdowns on alternatives to traditional tobacco, exemplified by the Juul saga.
Although PMI seemingly has the green light for its U.S. launch, the regulatory landscape remains volatile, with the potential for pushback from interest groups wary of introducing another tobacco product into the market.
Growth in Smoke-Free Revenue
While PMI may not break out IQOS’s U.S. performance explicitly, any upsurge in the total number of IQOS users or smoke-free revenue growth would be significant indicators of the product’s traction in the U.S. market.
The company’s pursuit of bolstered market share in smoke-free products by 2030, with two-thirds of its revenue expected to emanate from this segment, places the U.S. at the crux of this growth trajectory.
Furthermore, a surge in sales and marketing expenditure as PMI pushes its novel offering in the U.S. would be a pivotal focal point for investors to monitor.
Ripple Effects on Altria
Success for PMI with IQOS could reverberate across Altria, a dominant entity in the U.S. market with Marlboro holding a substantial market share in traditional cigarettes and a vested interest in NJOY as an alternative.
Given IQOS’s proposition to seize market share from conventional cigarettes with a less harmful product, Altria faces potential vulnerabilities in its Marlboro sales within the U.S. territory.
Should IQOS gain traction, it is poised to influence the broader demand for cigarettes, akin to Juul’s impact during its pinnacle.
PMI’s target to secure a 10% U.S. market share in tobacco and heated-tobacco unit volume by 2030 underscores its ambitions to disrupt Altria’s standing. A successful foray into the U.S. market, valued at $143.6 billion for nicotine products, is anticipated to resonate positively for the tobacco stock.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and Philip Morris International and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
