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Philip Morris Heat-Not-Burn Marlboro HeatStick, A Potential Market Share Driver

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  • For over 10 years, PMI has anticipated the market need for reduced risk cigarette alternatives.
  • PMI has developed reduced risk products that still preserve key aspects of the smoker experience.
  • PMI has developed reduced risk products that will comply with existing and emerging regulatory regimes.
  • PMI’s innovative reduced risk products are a potential opportunity for share gain.

In the last 20 years, the cigarette markets has been profoundly shaped by public health concerns over health effects of smoking. Governments have increased excise taxes, used minimum price laws and restricted smoking in public places or social locations. Smokers have faced greater expense, decreased liberty to smoke in many locations, and stigma.

The governmental push for curtailment of conventional cigarette use presented a challenge to cigarette makers to produce a cigarette alternative which is less harmful. Meanwhile, the growth of e-vapor cigarette alternatives is driven by lower price particularly for e-liquid products, and smoker desire to avoid the health hazards of smoking, the smoke, ash, and unpleasant smells associated with their habit. However, while smokers have shown interest, these devices do not fully respond to adult smoker preferences due to lack of taste and sensory satisfaction -- nicotine absorption is much slower than in traditional cigarettes.

PMI (NYSE:PM) has engineered a comprehensive and innovative response to these challenges. As recounted at the Philip Morris International Inc. Investor Day conference on June 26 2014, PMI anticipated the need for reduced risk products (RRPs) and pioneered their development, having set upon building their RRP capabilities in 2003. Their approach was not merely to build another e-cigarette. They understood that success depended on two factors. First, there had to be evidence of risk reduction based on sound scientific research. This would enable compliance with regulatory requirements. Second, they needed to preserve certain key aspects of the smoker's experience. Failure on either of these points would leave the new products vulnerable to regulatory curtailment, or would cause them to fall flat with smokers.

PMI built a unique capability to develop RRPs, investing $2B on research, development, scientific substantiation and adult smoker understanding. In addition to hiring over 300 world class scientists and engineers in key areas, they built a

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Value investing is like doing all your reading ahead of the class, showing up to class prepared, and preparing for exams by reviewing instead of all-night cramming upto literally the last minute. Anyone could do it, but it will always be the few who do, and the many who wish they had. I am fascinated by the psychological aspects of investment.

Analyst’s Disclosure: The author is long PM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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