Altria: IQOS sales disappear in a puff of smoke

Important points

All of Altria's plans to dominate the electronic cigarette market will be shattered. The tobacco giant announced that sales of Philip Morris International's IQOS heating device will be halted on November 29 to comply with the US International Trade Commission's (ITC) decision that the e-cigarettes infringe British American Tobacco's patents.

Although the decision has been appealed, it could be years before a final verdict is reached. The ITC gave the companies just 60 days to remove the devices from the shelves. With the future of Juul Labs' e-cigarette also in doubt, Altria could be pushed out of the market, although all is not lost.

For a while, it looked like Altria would play 3D chess to dominate the vape industry. Not only had the company invested billions of dollars in Juul to take over a third of the most popular e-cigarette on the market, but it also signed licensing and marketing agreements with Philip Morris to manufacture and distribute IQOS in the US under the Marlboro brand and for sale.

It wasn't long before Juul's success faltered when the company came under attack from anti-smoking campaigners and the Food and Drug Administration (FDA) over teens' use of the device. Juul's market share, which was around 75% in its heyday, has since fallen to around 41%.

Sales of e-cigarettes have also declined. At its 2019 peak, sales rose 60% year over year, according to Nielsen data, but by September sales had fallen to just 5%.

Also, Altria's $12.8 billion investment in Juul is now effectively worthless, as the company has written off nearly all of that amount. There are also serious doubts as to whether the e-cigarette will survive the FDA review process and be allowed to remain on the market.

The problem with IQOS was more of a gradual process. Although Philip Morris received FDA approval to sell the device two years ago - and last year approval for a reduced-risk label stating that the device is less harmful than cigarettes if users quit smoking completely - Altria has been slow to adopt.

The heated tobacco device is only available in a handful of test markets, and while Altria planned to roll it out nationwide this year, that's not going to happen now. British American is accusing Philip Morris of infringing on its patents by using an earlier version of the current technology in its own world-branded heated tobacco device.

In a statement on the IQOS website, Altria noted that the devices will no longer be sold after November 29 unless the US Trade Representative overturns the agency's decision, which rarely happens:

We are disappointed with the ITC's decision. We continue to believe that [British American Tobacco]'s patents are invalid and that IQOS is not infringing on those patents. We are working hard on a solution to make these products available again as soon as possible.

Still, it may not be the total loss it seems.

While it's possible Altria may be left without e-cigarettes on the market, given that the company discontinued its own MarkTen products after investing in Juul (a move that is also part of the ongoing investigation into the vape maker), E -Cigarettes make up a tiny portion of Altria's sales, and IQOS is negligible right now. It's supposed to be the future for tobacco stocks, but right now it's not a financial blow to the company.

In addition, the ITC decision only affects the import of IQOS. Philip Morris currently only manufactures the device in its factories in international markets, but it's possible Altria will set up a manufacturing facility in the US to circumvent the ban.

Of course, something like this cannot be built overnight and could of course also be legally challenged.

Even as cigarette consumption continues to decline, Altria generates billions of dollars in sales and profits each year. The $3.60-per-share dividend yields a 7.5% annualized return and is in no danger of being canceled, even as Altria's immediate plans for vape dominance begin to look like it.

Altria: IQOS Sales Vanish in a Puff of Smoke article first appeared on The Motley Fool Germany.

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This article represents the author's opinion, which cannot be consistent with The Motley Fool's "official" position of recommendation for a premium advisory service. Challenging an investment thesis—even our own—helps all of us think critically about investing and make decisions that help us be smarter, happier, and wealthier.

This article was written by Rich Duprey and was published on Fool.com on 10/30/2021. It has been translated so that our German readers can join the discussion.

The Motley Fool recommends British American Tobacco.

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