Analyst: Heat-Not-Burn Will Revolutionize Tobacco Industry

NEW YORK — The next step in tobacco products could be heat-not-burn technology, stated one industry analyst.

According to a Wells Fargo Securities LLC 10-year analysis on the market potential for Philip Morris International's (PMI) iQOS platform, the heat-not-burn technology "has the potential to change the trajectory of smoking," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities.

The belief that this technology could revolutionize the global tobacco industry comes amid different attitudes toward risk and regulatory constraints on behavior, Herzog noted.

There were several key takeaways from the Wells Fargo Securities analysis. According to Herzog, iQOS is a competitive advantage for both PMI and The Altria Group Inc. given its "superior technology, first-mover advantage with commercialization/clinical trials, and ability to leverage the Marlboro brand globally."

In late 2013, Richmond, Va.-based Altria and PMI announced a strategic framework to commercialize reduced-risk products and electronic cigarettes. The pact was expanded this past summer to include a joint research, development and technology-sharing agreement, as CSNews Online previously reported.

In addition, iQOS will accelerate the combined profit pool growth of combustible cigarettes and reduced-risk products in the next decade by 400 basis points to a 12.5-percent compound annual growth rate for PMI and by 260 basis points to a 9-percent compound annual growth rate for Altria, the analysis found. 

The analysis also revealed iQOS could displace up to 30 percent of the combustible cigarette industry in the developed markets by 2025; increase smoking prevalence; and accelerate the premiumization of the overall market, Herzog reported. 

"iQOS is a positive catalyst for both companies and gives them a competitive advantage," she said.

Herzog explained the platform could be "a win-win" for both tobacco companies, and Wells Fargo Securities "increasingly believes it could be the catalyst to reunite the companies," as some outlets have speculated.

Potential benefits could include significant synergies/cost savings; geographic diversification; better aligned incentives and opportunities especially as it relates to new technologies such as iQOS; and the ability to more effectively compete on a global basis, she pointed out. 

"However, regardless of a potential merger between the two companies, we believe PMI's strategic framework with Altria's to commercialize reduced-risk tobacco products and e-cigarettes is a clear positive for both," Herzog said.

The platform could also be a catalyst to drive a better alliance between public health and the tobacco industry, she said, pointing to PMI's clinical evidence gathered to date that suggests iQOS approaches a "gold standard" of cessation.

"Ultimately we believe iQOS has the potential to usher in a new public ethos and disposition toward smoking, aligning PMI with on-trend aspirations for healthier living, improving smokers' health trajectories and the way they feel about themselves as smokers, effectively redefining the smoking experience, which shouldn't be underestimated," Herzog explained.