Can disruption help tobacco giant Phillip Morris survive a dying industry?

Can disruption help tobacco giant Phillip Morris survive a dying industry?

The tobacco giant is shifting its focus to developing "reduced risk products" at its R&D centre in Switzerland

Phillip Morris International has taken a cannibalistic approach to disruption. The world's largest publicly tobacco company says that it wants to stop selling cigarettes.

Declining cigarette sales, smoking bans, a vaping boom and irrefutable evidence of health risks have led tobacco giants to shift their business models towards "reduced-risk products" (RRPs) that could provide a safer alternative to smoking.

PMI hopes its high-tech nicotine-delivery devices will give it an edge over its competitors. 

The Marlboro maker has ploughed billions of dollars into developing these products, launched an advertising campaign urging smokers to quit and founded a life insurance company that offers customers who kick the habit  discounts on their premiums of up to 50 percent.

It also offers a discounts of up to 25 percent to customers who switch from smoking to PMI's flagship RRP: the IQOS (I Quit Ordinary Smoking) heated tobacco product. Unlike e-cigarettes, which convert a nicotine-laced liquid into an inhalable vapour, the core substance in heated tobacco products (HTPs) is real tobacco.

PMI has made them the core product in its RRP portfolio, despite e-cigarettes having a bigger established market and more evidence of reducing the health risks associated with smoking. The company argues that heating tobacco instead of burning it subjects smokers to lower levels of toxic substances than those found in regular cigarettes.

Dr Gizelle Baker, director of scientific engagement at PMI, told Computerworld UK that HTP combines a less harmful product than cigarettes with an experience that is more similar to smoking than e-cigarettes.

"If you want to maximise the number of smokers that switch, you need to maximise the different types of experiences that will cause you to switc," Baker said. "For those who can switch to e-cigarettes, they should switch to e-cigarettes. It should be encouraged, it should be maximised, and we need to have products in that niche.

"But there are different things that people may enjoy and different reasons why people keep smoking, and if the taste of smoking tobacco, or the experience of that filter in their mouth is something that they miss with an e-cigarette, we need products for those people too."

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Recent financial reports suggest that what's good for the health could be good for shareholders. In PMI's second-quarter earnings for 2019, the company reported shipments of almost 15.1 billion HTP units, a 37 percent surge year-on-year. Over 10.4 million people now use IQOS, which is available in more than 40 markets.

However, not everyone is convinced of the health benefits.

The World Health Organisation (WHO) says that currently there is no evidence to demonstrate that HTPs are less harmful than conventional tobacco products and that the products have not been on the market long enough to draw clear conclusions about their effects on health. 

Other physicians have expressed more support for their use. Dr Peter Harper a founding partner of the London Oncology Clinic and leading consultant at Guy's and St Thomas Hospital, agrees with Baker that RRPs can help smokers quit, and compares outright rejection to refusing to offer boys the human papilloma virus (HPV) vaccination because they are not as at risk of infection as girls.

"It's an addiction. You have to face that. You have to accept that. The common sense of saying stop smoking doesn't work when you've got a billion smokers. You have to help with harm reduction, which is exactly what we're doing in everything we do, and I think not to engage with harm reduction is incorrect and wrong," Dr Harper said at a panel discussion on harm reduction through innovation panel organised by PMI at the Oxford Science Park.

"The point is being made whether vaping has more evidence for harm reduction than heated-tobacco products. It's the same to me as the vaccination of boys versus girls. Of course, we want to stop the vital cancer. Of course it has worked, as we can now see. It takes a long time to get the evidence but the scientific evidence for heated tobacco products is there."

Mission Winnow

After the panel discussion ends, we drive 35 miles north to the Silverstone racing circuit. PMI has sponsored the Ferrari Scuderia Formula One team since 1973, but a ban on tobacco advertising in 2007 forced the company to strip its logo from the iconic red Ferrari. Unlike its rival tobacco companies, PMI chose to retain its connection to the sport, primarily through corporate hospitality at race events, until it found an opportunity arose to return to the F1 livery. 

In October 2018, at the Japanese Grand Prix PMI launched Mission Winnow, "a new global initiative to create engagement around the role of science, technology and innovation as a powerful force for good in any industry." It was given the name Winnow because the word is used to describe the removal of the unnecessary elements from a group until only the best ones are left. 

Mission Winnow is a rare example of a sponsor with its own paddock at Silverstone. Inside the VIP hospitality complex that stands astride the track, it also has a lavish lounge for corporate entertainment, with an open bar, silver trays of food and celebrity guests from Jose Mourinho to Mark Wright. 

Guests on the balcony watch the race below, where they can spot the Mission Winnow logo adorned on the Ferrari race cars.

The Mission Winnow brand is exempt from F1's ban on tobacco sponsorship as the campaign does not directly advertise or promote any PMI-branded products and its logo of an arrow moving forward was promptly plastered on the Ferrari, a sight that has raised the ire of anti-smoking campaigners.

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In March, Ferrari removed the Mission Winnow slogan from its car, garage panels and personnel uniforms for the Melbourne grand prix that opened the F1 season, after Australian authorities launched an investigation into whether it circumvented the country's stringent tobacco advertising laws. The branding was restored for the next race in Bahrain, and it remained on the cars for the next four grand prix, until it was removed once again for the championship rounds in Canada and France, two other countries with strict cigarette sponsorship regulations.

Rumours abound that Ferrari is considering dropping the logo for the remainder of the season, and while they remain unconfirmed, the backlash shows that not everyone is convinced by the PMI pivot. 

This image problem remains a barrier to PMI's RRP plans. If the company is to shift from selling cigarettes to consumer electronics it will need to convince tech talent that they will be working for a different business to the one with such a tainted reputation in the scientific community. 

Baker is one scientist who has been convinced by PMI's change of strategy and believes that others will also recognise the positive impact of its work.

"As an epidemiologist, I also realised if you could prevent that from happening in the first place, that would have a huge image on public health that I could never have on the pharma side," she said. "It really does open the door to a whole different set of challenges. People who are driven by the fact that we can be commercially successful, but I can use my science and my expertise to really drive something that can have an impact on society brings people to us in a way that didn't last five, 10 years ago."

Disruptive tactics

The financial motivations for PMI's shifting strategy are more convincing than the ethical ones. In the global north, the cigarette industry is in terminal decline. PMI can replace some of this lost business with RRPs, but it faces stiff competition from both established tobacco giants and e-cigarette startups such as Juul.

PMI hopes that its combination of research and resources will help it take the lead. At its R&D facility in Neuchâtel, Switzerland, the company employs more than 430 scientists, electronic engineers and technicians, who focus on developing RRP.

It also runs innovation bootcamps, a Creative Lab dedicated to disruptive innovation, a venture fund that invests in RRPs solutions and an idea submission portal where people can propose their own technical enhancements.

The products they produce will need regulatory approval to succeed in the long-term, which is where PMI's resources can play perhaps their biggest part.

In April, the Food and Drug Administration (FDA) gave PMI permission to sell IQOS in the US, after reviewing an application that was reported to be over 1 million pages long and to have cost millions of dollars to produce, a process that PMI's smaller rivals would struggle to fund.

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It will still take much more time and money for PMI to gain full approval for its RRP. The FDA has yet to allow IQOS to be marketed as safer than traditional cigarettes, and other regulatory regimes have banned the products. Baker says PMI will continue to develop more effective and safer products.

"My view is lots of people look at solutions for today, and usually by the time you have a solution, it's no longer today," she said. "And if you really want to be at the forefront of disruption, you need to be looking at solutions for tomorrow and driving your innovation to meet that."

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