The Journal. - Philip Morris Tried to Pivot to Pharmaceuticals. It Didn't Go Well.

Episode Date: October 4, 2023

In 2021, Philip Morris International acquired three pharmaceutical companies for more than $2 billion as part of a plan to pivot away from cigarette sales. The deals inserted the Marlboro maker into the market for inhalers and other treatments for respiratory diseases that are linked to cigarette smoking. We talked with WSJ’s Jennifer Maloney about how the company’s plan hasn’t gone so smoothly. Further Listening: - The ‘Existential Threat’ Facing Big Tobacco  - The Fight Over a Menthol Cigarette Ban  Further Reading: - Marlboro Maker Hits Reset on $2 Billion Bet on Medicine  - Philip Morris Raises Offer for Swedish Match and Buys U.S. Rights for IQOS  Learn more about your ad choices. Visit megaphone.fm/adchoices

When people thought about big tobacco, they thought about Philip Morris. That's our colleague, Jennifer Maloney. Philip Morris sold many brands, but the most important one was Marlboro Cigarettes. And that's the biggest cigarette brand in the U.S. and a huge brand abroad as well, right? There's an icon here, right? The Marlboro Man. The Marlboro Man. Hot cup of coffee.

A good smoke. The simple things mean a lot out here. Out here in Marlboro country. You know, he's wearing the cowboy hat and he's in, you know, Montana somewhere, you know. And for many people, like, that was tobacco. That was smoking. It was the Marlboro Man. That was the old Philip Morris.

The new Philip Morris has been trying to diversify away from cigarettes. Over the last couple of years, the company has started moving into a new industry, healthcare. What happened? Did it work the way that they'd hoped? It didn't. The CEO told me, I didn't expect people to push back on us going into healthcare. I expected more encouragement for moving away from cigarettes. And that's not at all what happened. They had this idea that they could build a health and wellness business, and it hasn't gone as planned. Welcome to The Journal, our show about money, business, and power.

I'm Jessica Mendoza. It's Wednesday, October 4th. Coming up on the show, what happens when the biggest of big tobacco tries to reinvent itself? Summer's here, and you can now get almost anything you need delivered with Uber Eats. What do we mean by almost? You can't get a well-groomed lawn delivered, I'm going to take you back in time. This really famous moment, or I should say infamous moment, happened in 1994. And the top seven biggest tobacco company CEOs came before Congress at this blockbuster hearing.

The meeting of the subcommittee will come to order. They all raised their hands and swore that nicotine was not addictive. I don't believe that nicotine or our products are addictive. I believe nicotine is not addictive. I believe that nicotine is not addictive. And very soon after that, this fiction that they'd been selling the public about cigarettes sort of came crashing down on them. And people came to understand that the big tobacco companies had been lying and that cigarettes were addictive and very harmful for people's health.

And that the big tobacco companies had not been truthful about what they knew about the effects of cigarettes. What followed were lawsuits. States sought billions to cover the costs of treating smoking-related illnesses. Eventually, the tobacco industry settled for more than $200 billion. Philip Morris managed to stay in business, but it had to navigate a whole new world where everyone was talking about how deadly its product was. In the wake of these revelations, Philip Morris changed its name to sort of try to repair its reputation,

changed its name to something like really bland, and it took on the corporate name Altria. Altria spun off its business outside the U.S. and called it Philip Morris International. So if you buy Marlboro cigarettes in the U.S., you're buying from Altria. If you get a pack anywhere else in the world, you're buying from Philip Morris International.

Meanwhile, fewer people were buying cigarettes. In 2007, the smoking rate worldwide was 23%. Now, it's down to 17%. And it's projected to only keep falling. So, Philip Morris International decided to make tobacco products that were less harmful. And it pledged to eventually exit the cigarette business altogether. It became apparent they were going to have to develop new products, pivot to other areas, something to replace the cigarette sales,

which were steadily ticking down. And Philip Morris International became the leader of the pack. And it came out ahead of the others and said, we are going to move toward what they described as a smoke-free future. And we are going to pivot away from cigarettes. Imagine making a decision that results in the disruption of the very industry you operate in.

At Philip Morris International, we've done exactly that. Could you tell us about what these alternatives were? Yeah, their biggest cigarette alternative is a device called Icos. And it's a handheld electronic device. And you stick what looks like a short cigarette into this little device. This device heats tobacco, but it doesn't heat it to the point that it catches fire and burns. And I should note that their foray into alternative nicotine delivery devices has been successful. They have made great gains in shifting their business toward

what folks in the industry called reduced risk products. Then in 2021, Philip Morris decided to diversify even further. It went far afield from cigarettes into healthcare. So a couple of years ago, they made a big investment in pharmaceutical companies. And they said, we have some expertise in product development, in scientific research having to do with aerosolization and inhalation. And we can use that expertise and that experience in this new sector. we can use that expertise and that experience in this new sector. We can go into pharmaceuticals and kind of bring our knowledge to this niche area of inhalable medicine delivery devices. And Philip Morris went in big. It spent more than $2 billion on three pharmaceutical companies. The largest part of that investment

was on Vectora Group, a British company that makes inhalable medicine. Think asthma medication and other drugs that treat respiratory illnesses. Philip Morris was so optimistic about its pharmaceutical prospects that it announced some very rosy projections. Revenue of $1 billion per year from its healthcare business by 2025.

Philip Morris was like extremely bullish on how quickly it was going to be able to generate a whole bunch of cash from this new health and wellness business. And it turned out to be a lot more challenging than they expected. Just how challenging? That's next. Seth and Riley's Garage Hard Lemonade. A delicious classic with a vibrant taste of fresh lemons. The perfect balance of sweet and sour with a crisp, zesty edge.

Welcome to The Garage, the place of refreshing hard lemonade. Available at the LCBO. Must be legal drinking age. Please enjoy responsibly. Discover more value than ever at Loblaws. Like Price Drop. Hear that? Loblaws

lowers prices every four weeks on a selection of items, so you can save more. Whether it's pantry staples or seasonal favorites, you can look forward to new discounts throughout the aisles at Loblaws to get your essentials at great prices. It's your cue to stock up and save. Look for new value programs when you shop at Loblaws, in-store and online. In 2021, Philip Morris International got into healthcare. The companies it acquired made things like medicated chewing gum and lozenges, but also things like inhalers.

In other words, treatments for health problems associated with cigarette smoking, among other illnesses. Why pharmaceuticals and why these pharmaceuticals? It feels ironic. Yes, and it raised a red flag for many folks in the pharmaceutical industry and in the public health community that a cigarette maker would be getting into the business of treating asthma right. Philip Morris said, look, we have this expertise. We've invested billions in developing these new products that are used to inhale. And they weren't looking just to treat the illnesses that are associated with cigarette smoking.

They were looking broadly at delivery devices for medications that kind of are taken orally or inhaled. So they said, basically, we think that we can find like a place in this niche area of pharmaceuticals where we develop and bring to market things that could be useful to people and maybe help treat illnesses in a new and better way. And what response did the company get when they made these purchases? When Philip Morris and Victoria announced that they had made a deal on an acquisition, there was a lot of pushback. In one letter to the UK government, there were 35 groups that included several doctors who argued that the deal was not in the public interest and that it creates perverse incentives for Philip Morris to increase harm

through smoking so they might then profit through treating smoking-related diseases. How did Philip Morris respond to that criticism? Like, what were they saying about their investments at that time? Philip Morris pushed back on that and said, you know, that's ridiculous. We have been clear that we want to move beyond smoking. We want to shift away from cigarettes. Like, they totally rejected that criticism. Philip Morris' reputation soon caused business problems for its newly acquired company, Victura. Victura had had all these kind of like pending projects under discussion with big pharma companies. And after Philip Morris bought Victura, the big pharma companies walked away and said,

we can't do business with you or we won't do business with you. Did that have to do with the fact that they were now working with a tobacco company? 100%. There are a lot of restrictions in the health and medical world on interactions with big tobacco. For decades, medical associations, professional conferences, and even the World Health Organization have restricted big tobacco's involvement in research, manufacturing, and selling drugs. And Philip Morris ran into issues internally as well. The company had been working on an inhalable aspirin.

And earlier this year, Philip Morris had to disclose that things were not clipping along as fast as they expected. And one of the delays that they encountered was that a clinical trial of the inhalable aspirin that they were developing had been unsuccessful, and therefore they weren't going to be able to submit it to the FDA this year. So they had to sort of publicly come out and say, like, oops, we thought we were going to be able to submit this thing this year, but actually we're going to have to work on it some more. This year, Philip Morris slashed the value of its health and wellness business by $680 million. That's a third of what it spent on those pharmaceutical companies.

What does this mean for the company? Philip Morris had to publicly acknowledge that this has been more challenging than it expected and that things didn't go the way that they thought they would. And it means that Philip Morris has to pivot back to the reduced risk nicotine products that they had previously been focusing on as kind of the primary path forward. And they have said, look, we're not giving up on the healthcare business, but we are, quote unquote, reprioritizing. Philip Morris is acknowledging that the healthcare part of its business is not going to be generating big profits in the short run. It's even considering selling a stake in part of Victoria. It's also shifting its strategy back to tobacco alternatives

like Icos. It bought a Swedish firm that makes nicotine pouches that sit between the cheek and gum. But today, the majority of Philip Morris' revenue still comes from selling cigarettes. It took a lot for big tobacco to lose the trust of the public. But once it did, it sounds like it has been very, very difficult to regain it. Very difficult. And this is a point of frustration for people like Philip Morris's CEO, because he says, look, we're doing the thing. We are shifting our business away from cigarettes. What does this say about Philip Morris's ability to pivot? Or maybe even more broadly, you know, like tobacco company's ability to pivot.

It raises questions about how far can a tobacco company pivot, right? Like they have been grappling with an existential question about their future. Like what does a cigarette company become if we can't sell cigarettes? This is true for all the tobacco companies. They have to find some new path forward. And this episode at Philip Morris, I think, illustrates that it's not necessarily going to be easy. And the question now for Philip Morris and all the tobacco companies is, you know,

what are we going to sell in the future? What kind of companies are we going to be? That's all for today, Wednesday, October 4th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Ben Demmitt. Thanks for listening. See you tomorrow.