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Philip Morris Has a Nespresso Problem 

Philip Morris Has a Nespresso Problem 

(Bloomberg) -- Philip Morris International Inc. is girding itself to fend off rivals that may try to piggyback on the success of its market-leading alternative to smoking.

As PMI’s IQOS has grown, competitors such as Imperial Brands Plc have started offering sticks that can fit in the electronic devices that heat rather than burn tobacco, even though the packs say they’re designed only for the U.K. company’s Pulze system. In response, the Marlboro maker is preparing the next version of IQOS, which will work only with the company’s own heatsticks, according to Chief Operating Officer Jacek Olczak.

Philip Morris Has a Nespresso Problem 

“We’re working on heatstick-recognition technology,” Olczak said in an exclusive phone interview, without providing a timetable. “Only our stick will activate the device.”

As cigarette use declines in developed markets, companies are racing to develop next-generation products to fuel growth. By linking tobacco products to delivery mechanisms, they could be opening themselves to intellectual property tussles like those Nestle SA faced over its Nespresso system. The success of the coffee brand, which uses capsules that work only in specially designed machines, bred a flurry of copycat pods when the Swiss company’s patent protection expired.

Imperial was the last major international tobacco maker to enter the heat-not-burn field, lagging behind Philip Morris and British American Tobacco Plc. It has now started selling such a device in one city in Japan, the most developed market for the non-combustible tobacco devices.

While Imperial says its so-called iD sticks are made exclusively for Pulze, some retailers, including a third-party merchant on Japanese e-commerce platform Rakuten, mention that they’re the same size as those sold by market leader IQOS. With sales currently limited to Fukuoka in western Japan, some analysts say Imperial should fast-track the sticks into the broader market.

Playing Catch-Up

“Since Imperial is late to the game, it is important for it to find ways to play catch up,” Nico von Stackelberg, an analyst at Liberum, wrote in a note dated June 13. “Imperial could get a lot of earnings growth simply by getting iD sticks on-shelf next to the IQOS heat sticks and by educating retailers that iD sticks can be used with other devices.”

That may set up the industry for even fiercer competition and potential intellectual-property squabbles. PMI’s legal teams are reviewing Imperial’s products, Olczak said. Imperial Brands said it’s “confident” its products don’t use any “valid patented third-party technology.”

The company also said it’s considering expanding sales of Pulze and iD across Japan.

Philip Morris Has a Nespresso Problem 

Imperial isn’t the only intellectual property issue IQOS faces. Philip Morris has sued BAT in Japan for alleged patent infringement in its Glo heat-not-burn tobacco device. And a search for “IQOS compatible” on Amazon.com Inc.’s Japanese site produces 601 results showing a slew of imitation devices.

A spokeswoman for BAT said the case is likely to take some time to resolve, declining to comment further. Philip Morris expects a decision from the court of first instance next year, according to a spokesman.

PMI has been running clinical tests to determine whether IQOS poses lower health risks than traditional cigarettes. The company argues IQOS’s benefits are achievable only if it’s used as a closed system, in which it retains control over factors like temperature control and the ingredient mix.

--With assistance from Lisa Du.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Thomas Mulier

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