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Business

Philip Morris fearless about going smokeless

Philip Morris has sold more than 2 million iQOS tobacco heaters in Japan.

LAUSANNE, Switzerland -- "Smoke 'em if you got 'em." For more than a decade, U.S. tobacco giant Philip Morris International has been preparing for the day when the phrase evolves into, "Vape 'em if you got 'em."

Philip Morris started selling its iQOS electronic cigarettes in parts of Japan in 2014 and took them nationwide this past April. As of September, more than 2 million heater units had been sold, raising iQOS' share of the Japanese cigarette market to more than 4%. Miroslaw Zielinski, the company's president for Reduced-Risk Products, said the pace of market penetration is unprecedented.

The iQOS uses a blade to heat, rather than burn, tobacco inside a stick that is half the length of a regular cigarette. The heating process creates an inhalable vapor. The contraptions produce no fire, smoke or ashes -- and far less tar and other toxins than their conventional counterparts. They also emit less odor.

A Philip Morris researcher collects vapors from "reduced-risk products" in Neuchatel, Switzerland.

Working out of its Operations Center in Lausanne, Switzerland, which doubles as a corporate headquarters, Philip Morris sells Marlboro, Parliament and other cigarette brands in more than 180 markets. Its third-quarter results, announced on Tuesday, show its cigarette shipment volume fell 5.4%, excluding gains from mergers and acquisitions. This was due to sluggish cigarette demand in countries such as Argentina, Indonesia and the Philippines.

On the bright side, however, the volume of heated tobacco stick shipments reached 2.1 billion units -- an increase of around 900 million sticks compared to the second quarter.

Testing grounds

The company chose two countries to serve as testing grounds for the iQOS project: Japan and Italy. A big reason was that, in at least one respect, the countries were opposites. Japan allows more freedom in cigarette advertising than many other nations, making it easier to explain the product to consumers. Italy, on the other hand, bans direct marketing.

Chief executive Andre Calantzopoulos explained another reason for choosing Japan. "Smokers tend to care about people around them when smoking."

Encouraged by its results and facing production capacity constraints, Philip Morris in September opened a new Italian factory that can produce 30 billion sticks of smokeless tobacco a year. It expects total capital expenditure on such products to reach about $1.2 billion this year; it plans to raise the figure to $1.5 billion in 2017.

Now that iQOS is catching on in Japan, the company is ready to expand the project elsewhere.

Up in smoke

Philip Morris started developing what it calls "reduced-risk products" back in 2002 to 2003. It was obvious that regulations on smoking would grow ever tougher, and that people were becoming increasingly health-conscious. "We knew the age was coming," Calantzopoulos said.

The company opted to get ahead of the curve -- rather than, say, only focusing on emerging markets to offset headwinds in developed countries. But it has not been easy.

There has been plenty of trial and error. One example is the Heatbar, an earlier type of heat-not-burn tobacco. The company struggled to get the flavor right and replicate the "ritual" of smoking; the contraption was much larger than a regular cigarette. 

The Heatbar flopped and was discontinued. 

Yet, Philip Morris brought in new researchers from the pharmaceutical industry and forged ahead. And even with the promising iQOS results, it continues to explore other smokeless products.

One example is Platform 2, a prototype that looks more like a traditional cigarette and uses a carbon tip to heat tobacco. Platform 3, meanwhile, uses no tobacco at all -- it creates a chemical reaction between nicotine and weak organic acid. Platform 4 vaporizes liquid containing nicotine.

Platform 2 and 3 are set to hit the market on a trial basis in 2017.

"We need solutions for all kinds of [situations]," Calantzopoulos said. "There are many things to be discovered." Since iQOS and Platform 2 generate heat, for example, they could be considered hazardous in certain environments. 

A varied product lineup is also important because regulations differ from country to country. Indeed, regulations may well determine the future of electronic cigarettes.

Mixed messages

Philip Morris' rivals are bringing out smokeless products of their own. And while Euromonitor International says e-cigarettes still account for only 1% of the global tobacco market, the field is drawing more regulatory scrutiny.

In 2014, the World Health Organization issued a report on e-cigarettes and urged member states to restrict advertising, arguing that the health implications had yet to be assessed carefully. It added that there had been some reported cases of eye irritation and throat pain among vapers.

The WHO also asked states to ban e-cigarettes indoors until they are proven to be completely safe to people nearby.

In contrast, Public Health England in 2015 published a report saying e-cigarettes are around 95% less harmful than smoking. It went so far as to say that e-cigarettes have the potential to help smokers quit.

One other point PHE made was that there is no evidence e-cigarettes are a gateway to smoking for children and nonsmokers. This is a key argument among the skeptics of smokeless products. 

Philip Morris insists it only aims to convince smokers to switch to iQOS. The company says its data from Japan shows nonsmokers are rarely interested.

Still, the gateway question will remain a focus of debate, along with safety standards for heating devices. The risk of fire is believed to be small, but cases of burns need to be looked at closely.

"The biggest cost in reduced-risk products is not the research and development, but is the risk assessment," Calantzopoulos said. Even so, he is confident that as more tobacco and pharmaceutical companies join the fray, it will advance the debate on regulations.

That, in turn, could pave the way for the biggest smoking innovation in centuries to take hold.

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