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Philip Morris (PM) Invests in Reduced Risk Tobacco Category

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In an attempt to combat declining volumes, Philip Morris International Inc. (PM - Free Report) continues to boost presence in the unconventional tobacco category. As a part of this strategy, the company has announced that it will invest approximately €300 million in order to convert one of its cigarette factory at Papastratos into a manufacturing plant for tobacco sticks for reduced-risk product — iQOS (Heatsticks that heat tobacco instead of burning it).

The plant will have an annual capacity of about 20 billion tobacco sticks and employ a total of 1200 people (the existing plant employs approximately 800 people) when it is fully operational. Philip Morris has plans to expand the existing facility as the machines to be used for the manufacture of reduced risk products are larger than those required for making traditional cigarettes. Although construction on the site is scheduled to start effective immediately, production of the Heatsticks will commence in Jan 2018.

The facility at Papastratos is the third facility dedicated to the manufacture of reduced risk products. The first one being that in Bologna, Italy inaugurated in Oct 2016, with an investment of €500 million and an initial production capacity of 30 billion units annually. The manufacturing hub has the capacity to employ up to 600 employees.

Philip Morris is focusing on less harmful tobacco products in order to cater to growing demand for low-risk, smokeless tobacco products. The company has considerable presence in the unconventional tobacco products category. iQOS was first launched in Nov 2014 and is now sold in 20 countries. The products are expected to be available in key cities in over 30 markets in 2017.

The company is also engaged in extensive research for developing reduced risk tobacco products, which is in line with the guidelines set by the U.S. Food and Drug Association (FDA) regarding the tobacco products that can be sold in the country. Philip Morris has engaged 400 scientists for this project. In this regard, Philip Morris had filed an application with the US Food and Drug Administration (FDA) for IQOS products in Dec 2016.

Once the Modified Risk Tobacco Product (MRTP) claim is approved by FDA, the company will be able to enjoy a significant marketing advantage over other reduced risk tobacco products that are being sold currently. The regulatory authority is anticipated to take a minimum of 60 days for completing an administrative review of the application.

The strong presence of the company in the booming category of reduced risk tobacco products has bouyed investors, which is evident from its share price movement. The shares of the company has gained 22% in the past three months outperforming the Zacks categorized Tobacco industry which has gained 15% during the period.

As more and more people are shifting away from consumption of traditional tobacco products, there is rising competition among tobacco companies to capture market share by providing best quality tobacco products, which are potentially less harmful. Other tobacco companies like Altria Group Inc. (MO - Free Report) , Reynolds American Inc. and British American Tobacco (BTI - Free Report) have also come up with reduced risk tobacco products in order to tap into the growing preference for these products. Reynolds’ Vuse and Altria’s Mark Ten e-cigs are considerably popular in the market.

Philip Morris currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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