PHILIP MORRIS

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The growing importance of innovative tobacco products was the catalyst for Altria Group Inc.’s organizational restructuring announcement Tuesday.

The parent company of Philip Morris USA has split the nation’s top tobacco manufacturer into two divisions, effective June 1.

One division is focused on traditional core products that are made by Philip Morris USA, U.S. Smokeless Tobacco Co., Middleton and Nat Sherman.

The other division, Nu Mark, will concentrate on noncombustible products, such as electronic cigarettes, oral nicotine products and inhalable products, for which the company is seeking Food and Drug Administration approval on reduced-risk claims.

Even though Philip Morris USA’s iQOS heat-not-burn cigarette is a noncombustible product, the company placed it in the core tobacco division because of the Marlboro trademark associated with the product.

“This is a dynamic time in the tobacco industry, and just as we lead in traditional tobacco products, we intend to lead in offering adult smokers more choices in innovative, non-combustible, reduced-risk products,” said Howard Willard, who became Altria’s chairman and chief executive on May 17.

“We expect this new structure to accelerate our innovation pipeline, maximize our core tobacco businesses and allow us to continue to reward shareholders.”

Altria has created a chief growth officer position “to accelerate speed to market for innovative products and technologies. K.C. Crosthwaite, a 21-year company veteran, was named to the position.

“This function will identify marketplace and adult tobacco consumer insights, and translate them into strategies for product development, consumer engagement, future of commerce and business development,” the company said.

Bonnie Herzog, an analyst with Wells Fargo Securities, said the organizational change “makes a lot of sense to us especially in light of the company’s vision to lead in ‘authorized, non-combustible reduced-risk products’ in the U.S. while maximizing income from its core cigarette/smokeless businesses.”

The organization shift is similar to the recent initiative launched by British American Tobacco Plc and its U.S. subsidiary Reynolds American Inc.

Reynolds established its own subsidiary, R.J. Reynolds Vapor Co., for manufacturing, marketing and distributing Vuse, the No. 2 e-cig in the U.S. marketplace.

Nicandro Durante, BAT’s chief executive, has said BAT’s preference is to make products in or near the markets in which they are sold.

That could lead to a significant boost in Reynolds manufacturing jobs in Tobaccoville if BAT can gain FDA approval to bring in some additional traditional cigarettes, such as Lucky Strike, and innovative products, such as heat-not-burn glo.

Since 2012, BAT and Reynolds have spent a combined $2.5 billion on developing next-generation products that also include snus.

“Collectively, we refer to these products as our potentially reduced-risk products,” Durante said.

Durante said BAT had $552 million in revenue from next-generation products in 2017 when counting the sharing of Reynolds’ revenue from those products for seven months and then having full revenue for five months.

BAT projects $1.39 billion in next-generation products revenue in fiscal 2018, as well as nearly $7 billion in fiscal 2022.

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