Published on April 5th, 2017 | by Jimmy Hafrey
Philip Morris, one of the country’s top tobacco companies, is signaling yet again that it believes that there is a future in vaping.
Madison has recently published an article outlining the current and future investments this tobacco giant, which is headquartered in New York City, is making in the vaping industry, including a $324 million plan to convert one of their existing plants into a manufacturing plant for a new vape product.
Philip Morris is an American tobacco company that was founded in 198. It reports revenue upwards of over $75 billion a year, although its profit margins are shrinking every year. It is owned by the Altria Group.
This company has a long and storied history in America that dates back 180 years, but as fewer people smoke and move into vaping as a smoking cessation method, the company has made some changes to its business model to keep up with the times.
Philip Morris sees the vape market, which is estimated to reach nearly $19 billion in worldwide sales by 2020, as a way to continue to provide smokers with “reduced-risk” products that combine tobacco with new vape technology. Now that more people are aware of the dangers associated with tobacco and the burning aspect of the habit, vaping provides the company a way to move into a safer delivery method for its addictive product.
One of the reasons why Philip Morris is utilizing vape technology, perhaps, is because tobacco companies know that the FDA regulations, which went into effect on August 8, 2016, will shrink the market; it is estimated that nearly all of the vape products on the market now will be subject to PMTAs, an application process that will cost companies millions of dollars for their inventory.
Alongside the PMTAs, the vape industry is also facing other struggles at the state level: over a dozen states, including Wisconsin, California, Indiana, and Pennsylvania, have all added excise or wholesale taxes to vape products, making them expensive and not competitive with traditional tobacco products. The legal age limit for buying vape products is also rising, with over 24 states raising the legal age from 18 to 21 for both tobacco and vape products.
With so much expense levied against vape companies, most of which are small businesses with fewer than 250 employees, it is a great time for tobacco companies such as Philip Morris to come in and pick up the slack. These companies have more than enough money to pay for the application process while staying afloat.
For example, Madison reports that sometime last year, Philip Morris submitted an application to the FDA in order to have its iQOS product, a vape product that resembles a cigarette, labeled as a reduced-risk product. Because the FDA has full control over which products can be labeled as such, even though scientific studies have shown that vaping is 95 percent safer than traditional cigarettes, only it can decide which products get to carry the valuable “reduced-risk product” label.
The application that Philip Morris submitted for this honor is allegedly two million pages long and would have cost over $500,000 to piece together; that figure includes legal and consulting fees paid to the attorneys who looked over the paperwork.
Small vape companies can’t compete with Big Tobacco on money or resources; the latter is shown in full force when it was reported that British American Tobacco is in negotiations to buy Reynolds-American for the sole purpose of gaining access to its Core heat-not-burn technology, which is also known as HNB technology.
This technology mimics vaping in that it heats, not burns, a substance. The difference here is that instead of vape liquid, Big Tobacco companies are using it to heat real tobacco. Other companies have HNB devices as well; Philip Morris has a device with the same technology that is called iFuse Glo.
Now that it is possible to combine both tobacco and vape technology, tobacco companies are lining up to invest in it before the August 8, 2018, deadline for vape products hit, and Philip Morris is right at the head of the line.
The company released a statement last week outlining its intent to spend $324 million dollars of its capital to convert its Piraeus, Greece cigarette factory into a manufacturing plant for its new consumable HeatSticks that will be sold along with its iQOS devices.
Like many vape and HNB products, the iQOS device and the HeatSticks are two elements of the same product: the iQOS device is a heating element that uses a battery for power and the HeatSticks are tobacco-filed cartridges that are placed inside the heating unit. Once the tobacco is heated to the proper temperature, which is decided by the device, it can be inhaled by the consumer and then be discarded after use.
If all goes according to plan, the Piraeus factory will be fully converted and functional by January 2018 and will be able to produce 20 billion tobacco sticks every year. It will also become the third such factory for Philip Morris; the other two are located in Bologna, Italy, and in Switzerland. The company has already spent an estimated $3 billion in research and development for HNB and vape technologies and has said that:
“Our ambition is that one day potentially less harmful, smoke-free products replace cigarettes to the benefit of smokers, public health, and society at large.”
While the company’s HeatSticks and iQOS devices are still relatively new on the market, having recently hit US shelves, it seems to be a worldwide hit with smokers who are ready to try something new. It also seems plausible that now that tobacco companies are investing in HNB devices that the vape market could survive the FDA regulations, just not in the way the industry expected.