Philip Morris International Reaches Agreement With Altria Group, Inc. to End the Companies’ Commercial Relationship

Philip Morris International Inc. (PMI) (NYSE: PM) today announced an agreement with Altria Group, Inc. (Altria) to end the companies’ commercial relationship covering IQOS in the U.S. as of April 30, 2024. Thereafter, PMI will have the full rights to commercialize IQOS in the U.S. As part of the agreement, PMI will pay a total cash consideration of $2.7 billion, of which $1.0 billion was paid at the inception of the agreement using available cash. The remaining $1.7 billion, plus interest, will be paid by July 2023 at the latest.

The original agreement between the two companies, which established a roadmap for the commercialization of heat-not-burn products in the U.S., was announced in 2013 and accounted for Altria’s ownership of certain U.S. intellectual property rights related to the IQOS technology that were developed prior to PMI’s 2008 spin-off. Following IQOS’s authorization for sale in the U.S. in 2019, the agreement covered an initial 5-year commercialization term for the product through April 2024, with potential renewal – subject to certain performance milestones – covering a second 5-year term through April 2029.

“Today marks another historic milestone in our journey towards a smoke-free future,” said Jacek Olczak, Chief Executive Officer. “This agreement gives PMI full U.S. commercialization rights to IQOS within approximately 18 months and provides a clear path to fulfilling the product’s full potential in the world’s largest smoke-free market, leveraging PMI’s full strategic and financial commitment to IQOS’s success. The agreement also avoids what could have been an uncertain and protracted legal process that would have severely hindered the fast deployment of IQOS in the U.S.”

IQOS is the world’s leading smoke-free product, with strong growth achieved across a wide range of international markets. It established the innovative heat-not-burn category, driving its growth and becoming a $9 billion annual net revenue business outside the U.S. in 2021, some six years after its initial commercial launch. In this short time, the product has achieved double-digit national shares across a number of Asian, European and other markets – all with varying demographic profiles and adult smoker taste preferences.

The company views IQOS as a very substantial growth opportunity in the U.S. smoke-free market, whose retail value represents around 60% of that for the rest of the world, excluding China. The U.S. opportunity for IQOS is particularly significant given the clear demand from American adult smokers for credible smoke-free alternatives to cigarettes and the limited success to date of current offerings to fully switch adult smokers away from cigarettes. Furthermore, in the U.S., there are ample opportunities to build adult smoker awareness and understanding of smoke-free products, something that is particularly true for IQOS given its Modified Risk Tobacco Product (MRTP) authorizations.

“We are ready to invest behind IQOS to bring it to market at scale across the U.S., leveraging the proven capabilities of our outstanding commercial engine, which we will deploy domestically during the transition period to April 30, 2024,” Jacek Olczak continued. “The route-to-market is clear given the well-established distribution and retail channels in the U.S., and we are well prepared to proceed autonomously to develop IQOS and the rest of our smoke-free portfolio should the offer for Swedish Match fail.”

PMI is already well advanced in its plans for the commercialization of IQOS in the U.S., as it prepares for domestic manufacturing, important regulatory submissions – including Pre-market Tobacco Applications (PMTAs) for ILUMA in the second half of 2023 – as well as the development of U.S. sales, distribution, retail, consumer engagement and support capabilities over the next 18 months.

“Our commercial plans include full-scale launches in key cities and regions with rapid progression to a national presence, and we believe that IQOS heat-not-burn products could account for around 10% of total U.S. cigarette and heated tobacco unit volume by 2030. We estimate the industry profit pool for the U.S. at over $20 billion in 2021, underpinned by superior per-unit margin compared to PMI’s international market average. We see an accelerated path to profitability with an attractive payback period enhanced by the absence of a PMI domestic combustible tobacco business. We look forward to replicating our international success in fully switching adults who would otherwise continue to smoke, to better alternatives. According to 2022 U.S. Center for Disease Control and Prevention (CDC) data, the U.S. is home to around 31 million adult smokers, and I believe that IQOS – the only inhalable smoke-free nicotine product to have received an MRTP Authorization from the U.S. Food and Drug Administration and thus be recognized as appropriate for the promotion of public health – can play a meaningful role in further reducing smoking rates.” – Jacek Olczak, Chief Executive Officer.