Analyst Note
| Philip Gorham, CFA, FRM |We think the market is right to brush off the judgement in the U.S. by an International Trade Commission, or ITC, administrative judge in favor of British American Tobacco in a patent dispute with Philip Morris International. The dispute surrounds the technology that heats tobacco leaf to a temperature at which a nicotine aerosol is created, but below the point at which combustion takes place, thereby reducing smokers' exposure to the carcinogens found in cigarettes. The worst case scenario for PMI (and best case for BAT) is that imports of iQOS devices into the U.S. are prohibited, but we think advances in the technology will ensure that any such ban would have very limited strategic and financial impact for PMI, and its partner in the commercialization of iQOS, Altria, and PMI remains our quality pick in the undervalued tobacco sector.