Philip Morris: U.S. Ruling Against IQOS Has Little Impact (Preview)

Company Update (PM US) (Buy)

Summary

• We believe Friday's ITC ruling against IQOS, in the U.S. patent lawsuit brought by British American Tobacco, has limited impact.

• We believe patent claims against IQOS have no merit; Philip Morris has already successfully invalidated several in other courts globally.

• The ITC can ban U.S. imports of IQOS, but likely not immediately; existing IQOS sales in the U.S. are not material.

• The whole lawsuit may become moot with ILUMA, a new device based on a different technology, is launched in H2 this year.

• With shares at $97.70, we expect an exit price of $123 and a total return of 46% (12.0% annualized, including 5% in dividends) by 2024. Buy.

Introduction

On Friday (May 14), a U.S. judge released his "initial determination" on the U.S. International Trade Commission lawsuit filed by British American Tobacco (referred here as "BAT") against Philip Morris and Altria, finding that IQOS infringes two of BAT's patents.

We believe BAT's lawsuit has no merit and the ruling has little practical co…