E-CIGARETTES UNDER FIRE
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FORTUNE.COM // NOVEMBER 2019
smokeless customer base. PMI hopes to derive
about 40% of net revenue from smoke-free
products by 2025, up from 13.8% last year. And
responsible adult use is key to the IQOS pitch:
The idea is to serve up nicotine in a package
that’s less prone to abuse, or to ultra-intensive
use, than vaping devices have turned out to be.
Outside the U.S., the IQOS has found an
audience. The device, made its debut at the end
of 2014. As of last year, PMI says, there were
9.6 million users in 44 countries, with Russia
and Japan among its biggest markets. The FDA
cleared the device for sale in the U.S. last spring,
and Altria is handling marketing and distribu-
tion in the U.S. Unlike vape rivals who have sold
candy-like flavors, the IQOS is regulated like a
cigarette, and thus can sell no flavors other than
menthol and mint. And Olczak insists most of
its users are adults. “Underage use of IQOS is
0.2%, maybe 0.3%,” he says.
It can take several minutes to recharge an
IQOS device between uses—which can make
the smoking experience less like lighting a
cigarette and more like boiling water for tea.
But cumbersome as the process seems, it has
its loyalists. “Outside the U.S., people switch
from cigarettes to IQOS 60% to 70% to 80%
of the time,” says Lavery, the Piper Jaffray
analyst. PMI says it shipped 11.5 billion Heat-
Sticks in its fiscal first quarter this year. PMI
doesn’t break out revenue, but the product
could prove to be a lucrative seller—one not
yet tainted by the public-health concerns
over e-cigarettes.
Wall Street certainly sees an opportunity.
In a recent analyst note, Wells Fargo argued
that the retrenchment in the e-cigarette mar-
ket should incentivize Altria to aggressively
double down on heat-not-burn sales.
For now, PMI and Altria aren’t being specif-
ic about their growth goals. Atlanta is the test
market, Altria says, with devices and Heat-
Sticks rolling out through pop-up sales teams
and in 500 “retail trade partner stores,” mostly
convenience stores. Smokers can buy a starter
pack—an IQOS and a carton of 200 sticks—
for $80. Olczak is careful not to overpromise
on the health front. “I’m not saying IQOS is a
zero-risk product,” he says. “What I’m saying
is, it’s better than what’s available right now.”
And even that claim, it turns out, isn’t one
that PMI is legally allowed to make in the U.S.
Whether it will someday do so is in the hands
of the FDA.
THE FDA’S OVERSIGHT of e-cigarette products has
been a roller coaster of regulatory catch-up
and murky legal maneuvers. The agency first
attempted to regulate them as drug devices,
in 2009, but manufacturers successfully
blocked that effort. The passage of the Family
Smoking Prevention and Tobacco Control
Act, which President Barack Obama signed
in June 2009, gave the FDA the power to
regulate tobacco products for the first time,
but years of wrangling among lawmakers and
lobbyists delayed any new e-cig rules. It wasVAPE vs. “HEAT NOT BURN”The $9 billion U.S. e-cigarette
business is dominated by
vaping devices, which heat
cartridges of aerosolized nicotine
into a vapor that users inhale.HEAT-NOT-BURN
DEVICES USE A
DIFFERENT
MECHANISM:
They raise pods of
tobacco to a low heat,
causing the tobacco
itself to emit a nicotine
vapor, but without set-
ting the tobacco on fire
as traditional ciga-
rettes do. The heat-
not-burn IQOS device
(shown here) recently
debuted in the U.S.