When Andre Calantzopoulos talks about his vision for Philip Morris International (PMI)– and of some of the obstacles standing in the way of that vision – one might well be forgiven for imagining that he commands not the world’s biggest cigarette company but some new and disruptive force on the corporate map.
Curiously, in some ways it’s a mantle that fits. Since being spun off in 2008 from its US parent company, Altria (itself renamed from Philip Morris Companies Inc. in 2003), Swiss-headquartered PMI has delivered some US$83 billion to investors in dividends and share buybacks. Its products are sold in 180 countries worldwide and six of the world’s top 15 cigarette brands are in its stable, including Marlboro. And yet, and yet. Under Calantzopoulos – whose irascibility about regulatory frameworks holding back the market for “reduced-risk” nicotine products is matched by an almost paternal sense of pride in the lab-driven, design-savvy oomph of PMI’s offerings in that segment – the company seems rather set on shaking up its own future and that of the colossal industry it leads.
As CEO, Calantzopoulos has been clear that ultimately he does not want PMI to be in the cigarette business at all. As he sketches it, the objective is less of a moral crusade than a logical one: there are more than a billion smokers in the world and those who don’t wish to quit should be able to choose a better means of nicotine delivery than cigarettes. Cigarette companies campaigning for people to quit nicotine ain’t gonna happen but the movement toward a smoke-free world is well underway, so when it comes to developing and commercializing viable reduced-risk products, it’s a case of do or die. “Our existing competitors won’t have a choice [but to follow suit],” says Calantzopoulos, perched 25 floors up in a bright corner room of PMI’s Seoul offices. “Otherwise they are handing the market to us.”
In 2016, PMI sold 812.9 billion units of cigarettes worldwide, as opposed to just 7.4 billion units of the tobacco filler for IQOS, the most commercially advanced of its smoke-free nicotine “platforms.” Clearly, there is a long way to go to close that gap. But things are moving fast and PMI is well on its way to meeting a target of generating at least US$1.2 billion a year from smoke-free products by 2020. “To me, the faster the better. If we take a 10-15 year horizon, I wouldn’t be surprised if 50% of our business is in these products.”
The PMI portfolio of smoke-free products – which eliminate burning, the main source of the harmful toxicants associated with smoking – currently comprises two products, including IQOS, that heat tobacco without burning it, and two e-vapor products which do not contain tobacco at all. “I think at a certain time, once consumers move out of cigarettes, there will be demand for all of these products, which is why you need to have a portfolio.” To be sure, other industry giants, including British & American Tobacco and Japan Tobacco, have not been slow to launch their own smoke-free offerings. The market is shaping up to be a hotly competitive one.
Formerly a smoker of cigarettes himself, Calantzopoulos, who turns 60 this year and joined the company in 1985, has been an IQOS user “since the first prototype.” He says e-cigarettes – which involve “vaping” a nicotine-laced liquid – have been poor at converting cigarette smokers: their “retention rate” is between 10-15%, compared with 70-75% “so far” for IQOS. “The pharmacokinetics of the product, in terms of nicotine delivery, are very similar to cigarettes,” he adds.
Piloted in 2014, in Japan and Italy, IQOS is now available in 26 markets around the world. In early June, it launched in Seoul and will be made available throughout South Korea over the coming months.
“Korea has similar characteristics as a market to Japan,” says Calantzopoulos, noting that the latter has been IQOS’ most successful testing ground to date. The product was rolled out nationally in Japan in September 2015 and now has a 10% share of the country’s entire cigarette market, with well over a million smokers claiming to have switched to using it exclusively. (One man outside the IQOS store in Seoul’s Gwanghwamun tells Asia Times he has “switched” but still smokes the occasional cigarette when he’s drinking alcohol.)
“HeatSticks,” the small cigarette-like sticks of real tobacco which consumers slot into their devices, are “HEETS” on the Korean market. In both countries, a pack of 20 units costs roughly the same as a pack of Marlboros. But both have experienced supply issues: PMI claims a shortage of HeatSticks has meant sales of IQOS devices have had to be limited and the company is on a drive to increase manufacturing capacity to 50 billion a year by the end of 2017 and 100 billion by the end of next year, from 15 billion last year. The hardware – a battery pack that charges the pen-like device into which one’s HeatSticks slot – costs roughly US$100 whether you’re in Seoul or Osaka.
Yet where Calantzopoulos is effusive about the appetite for “innovation” on Asia’s eastern seaboard, he is less than impressed by “over-zealous” regulation of cigarette alternatives in other parts of the Asia Pacific region. Some governments – including those in Singapore, Australia, Thailand and Hong Kong – have imposed outright bans, while others have simply refused to treat smoke-free products any differently from cigarettes, making it difficult to communicate their attributes to consumers.
“There are demand measures that governments can implement to differentiate these products,” says Calantzopoulos. “They range from fiscal measures to different health warnings, because in any case it’s not the same product, it’s not a cigarette. There are markets like Australia where you cannot even talk to people, to consumers – and you cannot display the product. How are you going to explain the products to people? It’s a quasi-impossibility.”
PMI has been buoyed by recognition from health authorities such as Britain’s Royal College of Physicians that smoke-free alternatives present an opportunity to reduce preventable deaths. The company, says Calantzopoulos, wants to “work with governments” and for them to allow manufacturers to “communicate with consumers, for a fixed period of time” so that weaning off cigarettes can take place. “Logic says if these products reach 50-60% of the nicotine market, then you can start introducing supply side measures and really start phasing out cigarettes. If you do it too early, you will end up with a lot of contraband and no solution.”
In the US, PMI has made two filings to the Food and Drug Administration (FDA) relating to IQOS. One is a Pre-market Tobacco Product Application, which would allow the product to be commercialized on the US market without reduced-risk claims; the other is for a Modified Risk Tobacco Product (MRTP) marketing order, which would allow such claims to be communicated. The FDA began reviewing PMI’s MRTP application last month but may take some time to sift through it: the documents submitted run to over two million pages. Calantzopoulos is confident that the accumulated evidence – which includes over 170 peer-reviewed scientific publications and book chapters – shows the vapor generated by IQOS to be significantly less toxic than cigarette smoke. He adds, however, that further clinical and epidemiological studies are being undertaken, in addition to post-market surveillance of consumer behaviors.
“You can have a product that dramatically reduces individual risk; but if nobody adopts it you have no public health effect”
The debate over “harm reduction” is clearly one that PMI sees as winnable. But when it is put to him that another concept, that of smoke-free products acting as a “gateway,” may be harder to dispel if it is lit upon by anti-smoking lobbyists, Calantzopoulos grimaces. It has not escaped notice that the IQOS device has a certain smartphone-like quality to it, nor that the branded stores which have been used to engage consumers in Japan and South Korea – clean white fixtures and fittings, friendly young staff demonstrating the product’s features – call those of Apple instantly to mind. Won’t the charge from public health campaigners be that PMI is seeking to re-glamorize, or at least re-normalize, nicotine?
“We’re moving from a very conservative product to something that is a technology business,” Calantzopoulos admits, adding: “You can have a product that dramatically reduces individual risk; but if nobody adopts it you have no public health effect.”
Smoke-free products, he is adamant, are a gateway out of smoking, not into smoking. If he is wrong, regulators and health bodies will be quick to pounce on the fact. If he is right, perhaps the battle will simply re-focus on the effects of nicotine addiction. Either way, the industry’s future is beginning to look radically different to its past.
Good vision. Hope it happens.
Over the years, these drug feeding merchants have made more bucks in trading cigarettes than trading opium to Asia.