December 6, 2016,
Decision on modified risk claim could come in 2018.
SILVER SPRING, Md. — Philip Morris International (PMI) is preparing to bring its heat-not-burn tobacco product to the United States.
The Europe-based tobacco company has submitted a Modified Risk Tobacco Product (MRTP) application for its electronically heated tobacco product with the Food and Drug Administration’s (FDA) Center for Tobacco Products.
PMI is already offering its alternative tobacco product, known as iQOS, in several international markets. The company previously states its goal was to submit its application to the FDA this year.
According to the company, it anticipates the agency will take a minimum of 60 days to complete an administrative review to determine whether to accept the application for substantive review.
The move comes three years after PMI and Altria Group Inc. teamed up to establish a framework to commercialize reduced-risk products and electronic cigarettes, as CSNews Online previously reported.
Subsidiaries of the two tobacco companies entered into a series of agreements to address intellectual property licensing, regulatory engagement and contract manufacturing. Specifically:
Altria is providing PMI with an exclusive license to commercialize Altria’s e-vapor products internationally.
PMI is providing Altria, on an exclusive basis, two of PMI’s heated tobacco products for commercialization in the United States.
The companies are cooperating on scientific assessment, regulatory engagement and sharing improvements regarding those products.
The two tobacco leaders — Altria in the U.S. and PMI in the international market — expanded that pact to include a joint research, development and technology-sharing agreement.
In response to PMI’s Dec. 5 application to the FDA, Richmond, Va.-based Altria said “upon regulatory authorization by the FDA, Altria’s companies have an exclusive license to sell this heated tobacco product in the United States.”
After the agency accepts the application for substantive review, it has up to a year to make a final decision, bringing it into early 2017, according to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC.
If the FDA approves the application, PMI and Altria would be able to market iQOS in the U.S. with a health claim for a modified exposure or modified risk product.
“While this designation could be very powerful from a global public health standpoint, PMI will need to file a Premarket Tobacco Product Application (PMTA) to actually commercialize the product in the U.S. via an exclusive licensing agreement with Altria,” she explained, adding Wells Fargo Securities is encouraged by the timeliness of PMI’s first FDA application submission.
“We continue to believe iQOS is a positive catalyst for both PMI and Altria providing a unique competitive advantage,” Herzog added.
According to the analyst, PMI plans to file the PMTA in the first quarter of 2017 with a decision expected as early as July. A PMTA would allow iQOS to be marketed in the U.S. without a health claim, similar to how iQOS is currently being marketed in many countries, including Japan, “with great success.”
“Based on our analysis, we think 25 to 30 percent of the U.S. combustible cigarette market could be converted to iQOS by 2025 resulting in incremental volume for Altria as it could take up to 9 share points reaching 60-percent market share by 2025,” Herzog said.
“Further, we estimate iQOS in the U.S. will accelerate Altria’s top/bottom-line growth by around 240/260 basis points, driving an incremental $10 per share of value,” she explained.
In terms of PMI, Wells Fargo Securities thinks the U.S. market is a call option as it is 100-percent incremental for PMI and should drive an incremental $12 per share of value for the company.
Herzog added she remains bullish on iQOS “given the overwhelming success of the product in Japan, its strong margin profile since it is taxed 20 percent below conventional cigarettes there, tax benefits in other markets and growing consumer acceptance/conversion rates in other key markets” and the potential to “break the mold” with future platforms.
According to Herzog, Wells Fargo Securities also continues to believe a reunification of PMI and Altria makes sense.
Catalysts supporting a PMI/Altria combination include:
The likelihood of British American Tobacco and Reynolds American Inc. reaching a definitive agreement soon;
A generally favorable environment for merger-and-acquisition activity given still relatively low borrowing costs and the increased likelihood of future accelerated interest rate hikes by the Fed in this post-election environment;
A far less onerous legal environment in the U.S.; and
Greater visibility on timing of commercializing iQOS in the U.S.