Analysis-Philip Morris faces key test with US heated tobacco push By Reuters

By Emma Rumney

LONDON (Reuters) – Philip Morris International (NYSE:)’s goals for heated tobacco in the United States are reachable, analysts and investors say, even though rivals see limited potential in a market where vaping dominates.

The world’s biggest tobacco company by market value will launch its flagship heated tobacco device IQOS in the U.S. in the second quarter, developing the brand pretty much from scratch.

IQOS is already the top selling heated tobacco device globally and is central to PMI’s efforts to transform its image from a cigarette maker to a company driving the shift to healthier options.

In the U.S., heated tobacco is currently almost non-existent in what is one of the largest markets globally for alternative nicotine products.

PMI wants to get a 10% share of total U.S. cigarette and heated tobacco volumes within around five years of it launching the latest version of its device, not expected until at least 2025.

To do this would mean switching some 2.8 million U.S. smokers to IQOS, based on a Reuters analysis of PMI numbers and Barclays forecasts.

Rival British American Tobacco (NYSE:) has said it does not see huge potential for heated tobacco in the U.S. where vaping is dominant.

Two analysts and one investor in PMI told Reuters they see an opportunity for PMI in the U.S.

“We are all going to be watching this test,” said Bonnie Herzog, analyst at Goldman Sachs.

PMI has poured most of the more than $12.5 billion it has spent so far on smoking alternatives into IQOS’ development.

Heated tobacco devices heat up sticks of ground up tobacco without burning them in an attempt to avoid the harmful chemicals released via combustion.

Its U.S. roll out will be a key test of the device’s ability to appeal to smokers across different markets. If successful in the U.S., PMI would get a substantial base of new, profitable users and a hefty income stream. PMI estimates the total U.S. industry profit pool at around $20 billion.

PMI spokesperson Corey Henry told Reuters the company has every reason to believe it can replicate successes seen elsewhere with IQOS in the United States.

“In every market where we have launched IQOS, we’ve heard the same song from competitors. However it isn’t long before those same competitors jump into the category,” he said.

TRACK RECORD

Reuters used PMI’s most recent annual figures on total IQOS stick sales and total users to…