October 21, 2022
Philip Morris International (PMI) and Altria Group have announced an agreement to end the companies’ commercial relationship covering IQOS in the US.
As per the agreement, PMI will have the full rights to commercialise IQOS in the US after April 30, 2024.
PMI will pay a total cash consideration of $2.7 billion (£2.43bn), of which $1 billion was paid at the inception of the agreement, to Altria to secure the rights. The remaining $1.7 billion, plus interest, will be paid by July 2023 at the latest.
PMI licensed IQOS to Philip Morris USA, an Altria subsidiary, for US sales and distribution, and sales began in September 2019, but imports and sales of IQOS were halted in the US in November last year when the US International Trade Commission ruled that the IQOS device infringed on the patent rights of rival RJ Reynolds, a subsidiary of British American Tobacco (BAT).
PMI has faced similar patent suits by BAT in other countries, but courts in the UK and Greece have ruled in favour of PMI in those disputes.
The original agreement between PMI and Altria, which established a roadmap for the commercialisation of heat-not-burn products in the US, was announced in 2013 and accounted for Altria’s ownership of certain US intellectual property rights related to the IQOS technology that were developed prior to PMI’s 2008 spin-off.
Following IQOS’s authorisation for sale in the US in 2019, the agreement covered an initial five-year commercialisation term for the product through April 2024, with potential renewal – subject to certain performance milestones – covering a second five-year term through April 2029.
While Altria maintained that it had met each of these milestones, PMI disagreed and both companies were unable to reach a long-term agreement and decided ultimately to conclude their relationship.
“Today marks another historic milestone in our journey towards a smoke-free future,” said Jacek Olczak, PMI chief executive.
“This agreement gives PMI full US commercialisation 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 US.”
IQOS is the world’s leading smoke-free product, becoming a $9 billion annual net revenue business outside the US in 2021, some six years after its initial commercial launch. The product has since achieved double-digit national shares across a number of Asian, European and other markets.
The company said IQOS has a very substantial growth opportunity in the US. smoke-free market, whose retail value represents around 60 per cent of that for the rest of the world, excluding China.
“We are ready to invest behind IQOS to bring it to market at scale across the US, leveraging the proven capabilities of our outstanding commercial engine, which we will deploy domestically during the transition period to April 30, 2024,” Olczak continued.
“The route-to-market is clear given the well-established distribution and retail channels in the US, 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 added that it is already well advanced in its plans for the commercialisation of IQOS in the US, 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 US sales, distribution, retail, consumer engagement and support capabilities over the next 18 months.
Altria said the deal would give it greater flexibility to allocate resources for major smoke-free categories.
“We remain committed to creating long-term value through our Vision,” said Billy Gifford, Altria’s chief executive. “We believe that this agreement provides us with fair compensation and greater flexibility to allocate resources toward Moving Beyond Smoking.”
Altria, which recently ended a non-compete agreement with Juul Labs, said they have reinvested into internal product development system and expect to finalise designs for two smoke-free products, including a heated tobacco product, by the end of 2022.