PHILIP Morris (Malaysia) Sdn Bhd (PMM), a wholly-owned subsidiary of Hong Kong-based Philip Morris Asia Ltd, was making significant progress in converting smokers in the country to its reduced-risk product (RRP) — IQOS. Then, the Covid-19 pandemic struck.

The heat-not-burn (HNB) tobacco product, IQOS, was launched in Malaysia in 2018. The higher-margin IQOS began to make headway a year later, partly contributing to PMM’s 1,359.12% jump in net profit for the financial year ended Dec 31, 2019 (FY2019), to RM18.56 million from RM1.27 million in FY2018. But mainly, the merger of Godfrey Philips Malaysia Sdn Bhd, which was owned by Philip Morris International Inc (PMI), and PMM contributed to the profit surge.  The tobacco company also saw its revenue increased by 678.4% to RM1.08 billion in FY2019 from RM138.34 million the previous year.

However, the pandemic has disrupted its efforts to persuade adult smokers to switch from traditional cigarettes to smoke-free tobacco alternatives. Companies Commission of Malaysia (SSM) data shows that PMM’s net profit declined 69.6% to RM5.64 million for FY2020 as its revenue fell 7% to RM1 billion amid Covid-19 induced lockdowns. It has yet to file its financial statements for FY2021 with SSM.

Without disclosing the company’s earnings figures, PMM managing director Naeem Shahab Khan says 2021 has been a “challenging year” owing to the extended lockdowns.

“2021 is primarily focused on making sure that our teams remain safe and that our fundamental business is intact — that we are able to distribute, open our outlets and bring new products like lil SOLID 2.0 to the market — rather than revenue and profits. And yes, the longer lockdown periods (from June to September) have affected our business,” he tells The Edge.

For one, the temporary closure of its 29 IQOS retail outlets in Malaysia owing to movement restrictions had impacted PMM’s ability to communicate with consumers and slowed down plans to build awareness among smokers about reduced risk alternatives to conventional cigarettes, Naeem reveals.

“Our internal survey shows that more than half of respondents still think that there is no risk difference between RRPs and a normal cigarette. So our primary job, moving forward, is to make them understand there is a difference and we can only do that within our stores because we are not allowed to advertise this as RRPs are still a tobacco product,” he adds.

Still, Naeem notes that smokers who have switched to IQOS continue to stick to them. “That’s because once you start using RRPs, you will feel there is a big difference — less smoke, less smell, more convenience and you also feel better — that you don’t want to go back to cigarettes.”

On his outlook for PMM next year, he says: “We hope there will be no further lockdowns in 2022. We hope 2022 will be a better year than 2021. We will continue to drive our operational efficiency and make sure that our team works in a safe environment where Covid-19 continues to stick around. We need to make sure that we come back stronger as the economy recovers and drive more people away from cigarettes and other combustible tobacco to RRPs,” he says, as the company looks to ramp up sales of its HNB tobacco devices in the country via the introduction of the more affordable lil SOLID 2.0 on Nov 27.

Three years after its launch, the number of IQOS users have hit almost 115,000, accounting for 2% of all adult smokers in Malaysia.

Naeem declines to reveal PMM’s 2022 sales target for IQOS except to say that it is “much, much higher than what we had done in the past three years”. “There are about 5.9 million adult smokers in Malaysia. So you can imagine the headroom [for growth] is pretty high,” he adds.

PMM has so far retailed five versions of the IQOS heating device in Malaysia — IQOS 2.4+, IQOS 3, IQOS Multi, IQOS 3 DUO and lil SOLID 2.0.

“As we keep expanding our portfolio, we will review whether there is still a role to play for the products that we had launched previously. For example, IQOS 3 is no longer available because we now have IQOS 3 DUO. We will always look at meeting the right needs in terms of price and that’s why we have introduced lil SOLID 2.0 at RM99 — our first RRP that is priced below RM100,” says PMM director of commercial operations James Ryan.

As the group led by PMI moves globally in favour of smoke-free alternatives as part of what it calls a smoke-free future, what will happen to its traditional cigarette products such as Marlboro and Chesterfield? Naeem says: “It is a question that we’ve been asked multiple times. Today, if we stop selling Marlboro and Chesterfield, it doesn’t mean all the people who are smoking them will stop smoking.”

“To us, these products are important because they give us the ability to move as many people as possible away from the combustible cigarettes to smoke-free alternatives. We have a clear strategy on these products, but fundamentally,our drive is to make Malaysia smoke-free.

“Over the last five to six years, PMI has spent over US$8.1 billion (RM34.36 billion), or 98% of our total research and development budget, into developing RRPs. Today the RRPs are sold in over 70 markets,” he adds. It was reported that smoke-free products accounted for almost 30% of PMI’s total net revenue globally in the quarter ended June 30, 2021. By 2025, it aims to generate at least 50% of net revenue from these products.

Naeem says while sales volume has recovered for PMM, it is still below 2019’s pre-pandemic levels. That is because stay-at-home orders and fewer public activities have resulted in Malaysians smoking less. “The impact is felt by the entire industry.”

Meanwhile, a major positive benefit of the pandemic is that the illicit cigarette trade in the country has declined. “The pandemic has led to illegal cigarette consumption dropping from 64% before the pandemic to 57% currently.”

PMM takes wait and see approach on vape

Like its peers British American Tobacco (Malaysia) Bhd and JT International Bhd (JTI Malaysia), PMM is adopting a wait-and-see approach until there is an appropriate regulatory framework for nicotine vaping before it introduces other RRPs such as vape products to Malaysia.

“Today, vapes are illegal in Malaysia. There are a lot of discussions going on to legalise the vaping industry. Once they are legalised, we will have a vape product available but at this point in time, we are focused on our HNB products [IQOS],” says Naeem.

Vape players have spent years calling for the government to regulate the industry. Yet, sales of vaporiser liquids containing nicotine and e-cigarettes remain illegal at the federal level, although they are openly sold and easily accessible.

In January this year, the government imposed a 10% excise duty on all cigarette devices, both electronic and non-electronic. In addition, an excise duty of 40 sen per ml of vape liquids without nicotine was imposed. More recently, the authorities announced that they will introduce an excise duty of RM1.20 per ml on vape liquids containing both nicotine and non-nicotine from Jan 1, 2022.

“The government is trying to bring all vape products under the tax regime and I think that is a good thing for us because once these products come into the tax regime, there will be a fiscal or regulatory mechanism available for companies like us to play in that game. Currently, there is none.”

Still, JTI Malaysia had previously lamented that there is currently a huge disparity in the excise tax levied on nicotine products. For instance, HNB products such as IQOS are taxed at RM4 per pack, while vape liquids without nicotine are taxed at 40 sen per ml — 20 times less than legal cigarettes, with a pack of cigarettes taxed at RM8.

“As far as the taxation regime is concerned, our overarching philosophy is that taxation should be based on the risk level [of tobacco products]. The higher the risk, the higher the tax. We recognise that people should not smoke at all. If they smoke, they should try to quit. If they can’t quit, then we can be part of the solution by moving them to RRPs, and hence the tax treatment on RRPs should be different from a cigarette tax treatment. With the current mechanism which the government is following, I think they are moving in that direction,” says Naeem.

On Nov 23, it was reported that the Ministry of Health (MoH) is expected to table the draft of a new act to regulate the use of tobacco and e-cigarette products during the first session of the Dewan Rakyat sitting next year.

“Malaysia is at a crossroads. Over the last five to eight years, companies have invested in RRPs [including vaping, e-cigarettes and HNB variants]. How do we as a country benefit from these products and move as many people away from combustible tobacco products?

“Another thing to figure out is our kids should not smoke. People who have not started to smoke should not smoke. So, how do they make sure that the youth’s access [to tobacco products] is properly governed and prevented? We hope that MoH will look into this,” says Naeem.