Citi Not Convinced By Philip Morris' iQos

Earlier this year Philip Morris International Inc. PM launched iQos, its new heat-not-burn product, in major markets. Although early evidence of success is impressive, the product’s performance in Japan is not representative of the potential in Western markets, Citi’s Adam Spielman said in a report. He added that Europe’s regulatory environment is also less favorable.

Analyst Spielman maintained a Neutral rating on Philip Morris, with a price target of $106. He mentioned that the company’s shares already seemed to reflect some premium from iQos’ value.

Japan Not A Benchmark

Spielman noted that early evidence of success has been witnessed in Japan, with:

1. Rapid volume growth
2. Solid conversion of ~70 percent of smokers who tried the product for two weeks

“There is no other Next Generation Product in any market in the world that has taken as much share from conventional cigarettes as iQos has in Japan,” the analyst wrote. He added, however, that Japan was not “a representative template for any Western market.”

The analyst stated the reasons for not considering Japan as a representative template as:

• Many Japanese consumers are excited about the latest gadget
• Novelty in tobacco products is more important in Japan than in Europe or most other markets
• Japan has banned e-cigarettes, so there are no other next generation products
• The Japanese society is “particularly focused on reducing smells from cigarettes”
• Japan’s regulations on tobacco promotion and retailing are not that stringent, allowing extensive in-store promotions

Looking At Europe

“In the long-term Europe will be much more important as it is a larger market but so far most of the tests there are still very small. Only small, self-selecting groups of individuals that are willing to invest $70+ upfront to buy the device have tried iQos,” the Citi report noted.

Terming Europe as “intrinsically less fertile territory,” Spielman added that regulation in Europe is also less favorable.

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