Philip Morris CEO Says: Altria-Philip Morris Merger Is Dead

Philip Morris CEO Says: Altria-Philip Morris Merger Is Dead

The possibility of reuniting the two tobacco giants seems to have been finally stubbed out.

Amid growing scrutiny over Altria‘s (NYSE: MO) investment in leading electronic cigarette manufacturer Juul Labs, global tobacco giant Philip Morris International  (NYSE: PM) squashed the idea of merging the two cigarette companies.

In an interview with CNBC, CEO Andre Calantzopoulos said the merger conversation between the global tobacco giant and its domestic counterpart “is finished.” Philip Morris has moved on, and the two companies are now focused solely on commercializing the IQOS heat-not-burn tobacco device.

Philip Morris CEO Andre Calantzopoulos said the two companies were better off concentrating solely on distributing Philip Morris’ IQOS heated tobacco device. It is the only e-cig to receive FDA marketing approval, and Altria has the rights to market, distribute, and sell the device in the U.S.

“After much deliberation, the companies have agreed to focus on launching IQOS in the U.S. as part of their mutual interest to achieve a smoke-free future.”

Andre Calantzopoulos

While that is similar to comments Calantzopoulos made recently, it was only a couple of days ago that Philip Morris COO Jacek Olczak seemed to hold open the possibility that the two companies might yet join forces.

At a gathering of global political and business leaders in Davos, Switzerland, Philip Morris COO Jacek Olczak reportedly said in answer to a question about whether Philip Morris would revisit the idea of a merger, “the chapter is closed, but not the book.”

The two cigarette companies separated in 2008

Altria is the U.S.-based tobacco giant that markets its cigarette brands like Marlboro while Philip Morris has the right to sell Marlboro and other brands in foreign countries. The two separated over a decade ago as a means of walling off the company’s foreign assets from the lawsuits that have dogged the tobacco company for decades.

Yet over the years, the two companies have increasingly forged closer ties, especially on the subject of reduced-risk products like the IQOS. An agreement between the two companies made several years ago gave Altria the right to market, distribute, and sell the IQOS in the U.S. under its Marlboro banner.

Last year the Food & Drug Administration (FDA) approved Philip Morris’ application to sell the device in the U.S., though the tobacco company is still awaiting word on whether it can earn a reduced-risk designation. Altria has begun rolling out the IQOS into several markets.

However, the e-cig industry was thrust into turmoil by what the FDA called a rising “epidemic” of teen use of the devices, particularly those made by Juul Labs. At one point it owned around 80% of the market, though FDA agitation against the company and an outbreak of lung illness related to vaping marijuana has peeled back some of its market shares.

Altria had made what at the time seemed like a smart investment, taking a 35% stake in the e-cig company for $12.8 billion. That, however, preceded the FDA’s railing against the popularity of the Juul device with teens and it calling both companies on the carpet for supposedly reneging on their promise to limit teen access to e-cigs by joining forces.

TOBACCO
IMAGE SOURCE: CNBC

They May Soon Have the Entire Market Virtually to Themselves

It was during this period that Philip Morris and Altria began discussing the possibility of reuniting their companies.

Calantzopoulos said he sees consolidation in the e-cig industry’s future, and that is undoubtedly true as the FDA’s deadline for electronic cigarette companies to submit pre-market tobacco product applications is fast approaching and few e-cig manufacturers will be able to meet the high hurdle the FDA has set by themselves. So far, only Philip Morris and British American Tobacco have had the resources to file their applications, and have done so at great expense. For those companies unable to comply, their products will be pulled from the market, giving the biggest players a chance to scoop them up at significant discounts.

Philip Morris’ application was several million pages long, including supporting documentation and cost millions of dollars to produce. The application for British American Tobacco‘s Vuse e-cig was several hundred thousand pages long. There are very few manufacturers that will be able to afford to file an application with the agency, so Philip Morris concentrating solely on the IQOS without distraction makes sense.

It also returns to Philip Morris investors the ability to decide for themselves if they want to be exposed to the litigious and highly regulated U.S. market. 

However, with the FDA routinely pillorying Juul and the e-cig maker coming under more intense scrutiny from the Federal Trade Commission over its marketing tactics, Philip Morris announced that while the two tobacco companies had been in early talks about a merger, that was over and the two would instead “focus on launching IQOS in the U.S. as part of their mutual interest to achieve a smoke-free future.”

Calantzopoulos says Philip Morris wants to be the e-cig leader with its IQOS device and is getting ready to launch a new version called IQOS Mesh. The device uses a metallic mesh to heat a pre-filled, pre-sealed “cap” containing an e-liquid. Called VEEV, the caps contain nicotine, flavors, and a heater.

Because they’re all self-contained and produced by Philip Morris, they solve the problem of third parties concocting e-liquids that may contain harmful additives.

The CDC says an outbreak last summer that saw thousands of vapers injured and dozens killed from lung injuries is likely linked to “tetrahydrocannabinol (THC)-containing e-cigarette, or vaping, products, particularly from informal sources like friends, family, or in-person or online dealers.” So a closed system has benefits.

Although keeping Altria and Philip Morris separate made sense for a lot of investors, as it gave them the choice of whether they wanted to be exposed to the litigious U.S. tobacco market, there are good arguments to be made for joining them together again.

Further about IQOS:

Source: The Motley Fool

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