Magic bullet?

| February 1, 2017

IQOS could spell the beginning of the end for combustible cigarettes. But will it receive the required regulatory support?

By George Gay

When Philip Morris International (PMI) reported in February last year that its 2015 cigarette shipment volume was down by 1 percent, CEO Andre Calantzopoulos was able to provide some good news too, part of which described how PMI had significantly expanded the rollout of iQOS—one of its heated tobacco vapor products—in Japan and had introduced it into several new markets. Cigarette volume was down again, this time by 1.4 percent, when the company reported in April 2016 its first-quarter results for 2016, but at that time Calantzopoulos was able to say that PMI was “excited by the progress, best represented by our impressive HeatStick [the consumable insert part of the iQOS system] share momentum in Japan, of our reduced-risk product, iQOS.”

The second quarter, reported in July 2016, saw cigarette volume down by 4.8 percent, but again the news from the vapor front was better. “A highlight of the quarter was our exceptional iQOS performance in Japan, where HeatSticks reached a national share for the quarter of 2.2 percent, demonstrating the tremendous potential of the reduced-risk products category,” Calantzopoulos said in a statement that seemed, in talking of an actual market share rather than generalities, to lift the progress of iQOS onto another plane. And in the third quarter, reported in October 2016, cigarette volume was down by 5.4 percent, but Calantzopoulos was able to say, “We are particularly encouraged by the strong performance of iQOS across all of its launch geographies, particularly in Japan, where HeatSticks recorded a quarterly share of 3.5 percent.”

Three and a half percent. It doesn’t take a genius to figure out where this is going, especially given the fact that, in September 2016, PMI announced that it was inaugurating in Italy its first manufacturing facility for large-scale production of two heated-tobacco alternatives to cigarettes. The initial annual production capacity of the factory, which has involved an investment of about €500 million ($532.12 million), will be about 30 billion units. The announcement was given weight, I believe, by the fact that it was made at an event at the factory in the presence of then Italian Prime Minister Matteo Renzi.

“Our ambition is to lead a full-scale effort to ensure that noncombustible products ultimately replace cigarettes to the benefit of adult smokers, society, our company and our shareholders,” said Calantzopoulos. “This factory is a milestone in our roadmap toward this paradigm shift.”

But if there were still any doubts about PMI’s commitment to heated-tobacco technology, Calantzopoulos disposed of them in announcing toward the end of last year the launch of iQOS in the U.K. At that time, he said he would like to work with governments toward the “phase-out” of conventional cigarettes. He was quoted by the BBC as saying that the company knew its products harmed their consumers and that the only correct response was “to find and commercialize” ones that were less harmful. “That is clearly our objective,” he said.

Long road ahead

Andre Calantzopoulos

Not everyone was won over. The Guardian newspaper quoted Rae Maile, tobacco industry analyst with City of London firm Cenkos Securities, as saying that Calantzopoulos was vague about how long it might take for cigarettes to disappear. “He didn’t say when … so it’s any time in the next century,” Maile said. “There are 1 billion people quite happy with smoking,” he said. “Cigarettes are easy to use, convenient and don’t need recharging. People know the health risks and are willing to accept them.”

Maile was perhaps a little harsh in expecting a timeline for the phase-out, but there’s clearly some truth in what he said. Inertia reigns, and it will take some heavy lifting by a lot of people—some of whom are not used to cooperating with each other—to shift smokers away from their habit. But, then again, sometimes products just capture the imagination. Calantzopoulos said that trials in Japan had shown that 70 percent of smokers stayed with iQOS, compared with a general conversion rate of 20 percent for e-cigarettes.

Maile’s comments hit home, however, partly because of his raising of the convenience issue. But even this has two sides to it. On the one side, a pack of cigarettes and a lighter constitute a very compact and easy-to-use system of nicotine delivery. On the other, cigarettes are not convenient if you are unable to use them in an increasing number of places, even in your own home if you live in some multi-unit dwellings in the U.S. and elsewhere. So clearly, if governments decide that it is preferable that those people determined to use nicotine products vape rather than smoke, they can help in balancing the convenience issue by allowing the use of vapor devices in more places than they allow the use of cigarettes. As Calantzopoulos implied at the launch of iQOS in the U.K., there are good reasons why governments and the vapor industry should work together on these issues—as long as any discussions are open.

Much will depend, no doubt, on how representative Japan’s tobacco and vapor markets turn out to have been. And now that the iQOS manufacturing capacity limitations have been overcome, the U.K. market will be an interesting test from a number of points of view. I’m not a marketing man, but I would be surprised if there wasn’t a fairly large gap between the attitudes and aspirations of Japanese and British nicotine consumers.

Another issue concerns the fact that the authorities in the U.K. have generally embraced the idea of tobacco harm reduction and gone a long way in encouraging smokers to use e-cigarettes to try to quit smoking. Despite what the U.S. Food and Drug Administration and the European Commission might think, e-cigarettes are not tobacco products. But iQOS is a tobacco product—though not a combustible one—and it will be interesting to watch how, if at all, the launch of iQOS shifts the vapor debate in the U.K.

Broad debate

Products such as iQOS have great potential, providing that authorities embrace the principle of harm reduction and implement appropriate regulatory frameworks.

One thing that is certain is that there needs to be a wide-ranging debate about products such as iQOS, Japan Tobacco’s Ploom and British American Tobacco’s Glo. I noticed that the preamble to a question posed last year by a member of the European Parliament to the commission said, in part, “The major difference between iQOS and e-cigarettes is that while the latter use a liquid transformed into vapor, iQOS heats the tobacco and keeps it burning, which is very harmful to health.” The commission, for all its faults, is usually well-informed, and I’m sure that the answer, which I hadn’t seen at the time of writing, will point out the error—and the danger—of using the word “burning,” given that the developers of these products have gone to considerable lengths to ensure that the tobacco they contain is not burned.

Tobacco and vapor companies can go some way toward promoting the harm reduction debate, and, on its website, PMI describes its various vapor products as consumer goods, intended as substitutes for combustible tobacco products. It says that any claim that the use of a particular product is less harmful than is smoking should be backed up by robust science. “Our scientific assessment program follows a step-by-step approach inspired by standards and practices long adopted by the pharmaceutical industry and by guidance issued by the U.S. [Food and Drug Administration’s] Center for Tobacco Products,” it says.

“Our studies on one of our heated-tobacco products, Platform 1 [iQOS], are well-advanced. We have already determined that the aerosol generated by Platform 1 produces 90 to 95 percent less harmful and potentially harmful compounds compared to a reference cigarette, and that the aerosol is 90 to 95 percent less toxic than smoke from a reference cigarette. In a three-month clinical study recently carried out in Japan and the U.S., the average reduction in 15 biomarkers of exposure to 15 harmful and potentially harmful compounds measured in smokers who switched to Platform 1 approached the effect observed in smokers who quit smoking for the duration of the study.

“While conclusions on the risk reduction profile of Platform 1 will be based on the totality of the evidence, such results give us confidence that we are on course with our plans to demonstrate that Platform 1 is not only a reduced-exposure product but also a less harmful alternative for smokers.”

PMI’s science is to be put to the test. In December 2016, the company announced it had submitted to the U.S. Food and Drug Administration’s (FDA) Center for Tobacco Products a modified-risk tobacco product (MRTP) application for its iQOS electronically heated tobacco product. “This is consistent with the company’s stated goal of submitting its MRTP application in 2016,” the company said in a note posted on its website. “PMI anticipates the FDA taking a minimum of 60 days to complete an administrative review to determine whether to accept the application for substantive review.”

There is a lot at stake here, and it is just as well that PMI is making this application. Much of the vapor industry is currently under threat in the U.S. because of the rules brought in by the FDA that have deemed e-cigarettes to be “tobacco products” and that in important aspects are more restrictive than are the rules governing traditional tobacco cigarettes. Some observers have been fighting to put clear water between e-cigarettes and combustible cigarettes and have been hoping that the new administration would be opposed to the deeming rule’s threatening the existence of thousands of small businesses. Launching onto the U.S. market a vapor device that does contain tobacco might complicate the debate and will almost certainly be used by those intractably opposed to vapor products.

Of course, a premarket tobacco product application will be made for iQOS soon, and the product is likely to be on the U.S. market by July, a long while before it receives MRTP certification, assuming that its MRTP application is successful. But if the FDA accepts the MRTP application for “substantive review,” this will go at least some way to placating some of those opposed to vapor products.

If the FDA were to grant an MRTP in respect of iQOS, it would certainly be a game changer given that U.S. consumers proved accepting of the product. But it would probably be as well not to hold our breath. The FDA proved inordinately slow and ultimately unhelpful in assessing the first full MRTP application to be put before it, which had to do with snus, a tobacco product that doesn’t involve inhalation and that has been shown to be protective against Parkinson’s disease (also see “Trailblazer,” page xx).

High stakes

Bonnie Herzog

There is a lot at stake, too, beyond the reduced-risk battleground. Following the announcement by PMI that it had made an MRTP application for iQOS, Altria issued a reminder that it has an exclusive license to sell the product in the U.S. In December 2013, PMI and Altria announced that they had established a strategic framework to commercialize reduced-risk products and e-cigarettes. “Under the terms of a set of licensing, supply and cooperation agreements, Altria will make available its e-cigarette products exclusively to PMI for commercialization outside the United States, and PMI will make available two of its candidate reduced-risk tobacco products exclusively to Altria for commercialization in the United States,” the announcement said.

Bonnie Herzog, managing director of equity research for tobacco (and a number of other business sectors) at Wells Fargo Securities, said that, based on a detailed, 10-year analysis of the market potential for the iQOS platform globally, she believed the product had the potential to change the trajectory of smoking. And, she added, both PMI and Altria had a competitive advantage given iQOS’ “superior technology,” given its “first mover” advantage with commercialization and clinical trials, and given the ability to leverage the ubiquitous Marlboro brand.

In fact, Herzog believes that the iQOS issue could accelerate the acquisition of Altria by PMI. Herzog said that iQOS would be worth more to PMI if it owned Altria because PMI would in that case capture the full sales margin. It would also be able to accelerate the growth of iQOS in the U.S. given that it would then have full control over sales and distribution there, as well as elsewhere in the world.

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