Aall plans Altria (NYSE: MO) had to dominate the electronic cigarette market are choked. The tobacco giant announced the sale of the IQOS heated tobacco device from Philip Morris International (NYSE: PM) will end on November 29 to comply with the United States International Trade Commission (ITC) ruling that its e-cigs violated British American Tobacco‘s (NYSE: BTI) patents.
Although the decision is under appeal, a final verdict could take years to be reached, and the ITC has only given cigarette makers 60 days to remove the devices from store shelves. With the future of its Juul Labs e-cig also uncertain, Altria could be shut out of the market, although all may not be completely lost.
An IQOS device. Image source: Philip Morris International.
Holding all the cards
At one point it seemed that Altria was play 3d chess to dominate the electronic cigarette industry. Not only had she invested billions of dollars in Juul to take a third-party stake in the most popular e-cig on the market, but she had also signed licensing and marketing agreements with Philip Morris to manufacture, distribute. and sell the IQOS in the United States under its Marlboro brand.
It didn’t take long before the wheels started sticking out of the sauce train, as Juul came under attack by anti-smoking activists and the Food and Drug Administration (FDA) for using the device by them. teenagers. Juul’s market share, which was around 75% at its peak, has fallen to a recent level of around 41%.
Sales of electronic cigarettes have also declined. At their peak in 2019, sales were up 60% from the previous year, according to Nielsen data, but by September, volumes were only up 5%.
Altria’s $ 12.8 billion investment in Juul is now also virtually worthless as the company has written off almost the entire amount. There is also substantial doubt as to whether the e-cig will pass the FDA review process and be allowed to remain in the market.
No ace in the hole
The problem with IQOS was more of a slow burn. Although Philip Morris got FDA approval to sell the device two years ago – and last year got approval for a reduced risk label that says it’s less harmful than cigarettes if users quit smoking altogether – Altria has slowed the rollout.
The heated tobacco device is only available in a handful of test markets, and while Altria planned to roll it out nationwide this year, that won’t happen now. British American accused Philip Morris infringed his patents using an earlier version of current technology that she developed for her own glo brand heated tobacco machine.
In a statement posted to the IQOS website, Altria noted that the devices will no longer be sold after November 29, unless the U.S. sales representative reverses the agency’s decision, which rarely happens:
We are disappointed with the ITC decision. We keep believing [British American Tobacco’s] the patents are invalid and IQOS does not infringe those patents. We are working hard on a solution to make these products available again as soon as possible.
Still, this may not be the total loss it seems.
Image source: Getty Images.
Downstairs but not outside
While it is possible that Altria may find itself without an e-cigarette in the market, since it has shut down its own MarkTen products following its investment in Juul (a move which is also part of the ongoing investigation into the e-cig maker), e-cigs accounted for only a tiny fraction of Altria’s revenue, and IQOS is negligible at this time. It’s supposed to be the future for tobacco stocks, but at the moment it’s not a financial blow to the company.
In addition, the ITC decision only affects the import of IQOS. While Philip Morris currently only manufactures the device at its factories in international markets, there is a possibility that a US-based manufacturing facility will be developed by Altria to circumvent the ban.
Of course, it’s not something that can be built overnight, and could clearly itself be the subject of legal challenges.
Even as smoking continues to decline, Altria still generates billions of dollars in revenue and profit every year. Its dividend of $ 3.60 per share earns 7.5% per year and is unlikely to be stifled even though Altria’s immediate plans for e-cig dominance increasingly appear to be.
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