Philip Morris Sues Thai Government Over Anti-Tobacco Law

June 28th, 2013 by Trefis Team
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Philip Morris International (NYSE:PM) has sued the Thai government over a new anti-tobacco law requiring larger graphic warnings on cigarette packs. The Thai government has decided to extend health warnings from 50 to 85% on each side of every cigarette pack sold in the country. [1] Philip Morris is not the only one to take a legal action against the government, as Japan Tobacco Inc. and the The Thai Tobacco Trade Association (TTTA), which represents 1,400 retailers across the kingdom, have also filed separate cases against the health ministry. [2] This new rule is somewhat similar to the plain packaging law implemented by the Australian government last year. Philip Morris also sued the Australian government against the law and was defeated in the local court however, the case is still going on in International courts. (See: Philip Morris Earnings Face Headwinds From Anti-Tobacco Laws) Going by what happened in Australian local court, we believe, the tobacco companies might meet the same fate in Thailand as well.

Philip Morris International is a leading international tobacco company with its products sold in more than 180 nations worldwide. Until its spin-off in March 2008, Philip Morris International was an operating company of Altria Group (NYSE:MO). Excluding the U.S. and China, the company holds more than 28% of the total international cigarette market, led by its flagship brand Marlboro.

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The Thailand government aims to cover 85% of the area on each side of every cigarette pack sold in the country by graphic health warnings, leaving just 15% of the area for manufacturer trademarks and logos. This is a new benchmark in the global tobacco industry in terms of the pack area used for health warnings. Even in Australia, where the government has implemented the plain packaging law, health warnings are required to cover at least 75% of the front and 90% of the back of a cigarette pack, implying an average of 82.5% of the pack area to be covered by health warnings. The EU members recently agreed to implement a new anti-tobacco law requiring a minimum of 65% of the pack area to be used for health warnings. [3]

Although public smoking is banned in Thailand, data from the Office of Tobacco Control in the country shows that smoking rates have remained largely stable around 27% since 2009. This shows that previous attempts by the government of curbing adult smoking rates have not been very successful. However, the Thai government expects to reduce smoking prevalence in adults by deglamorizing the cigarette packs to make them repelling and increase health awareness among adult consumers. [2]

The Department of Health and Aging of the Australian government conducted a research evaluating the effectiveness of graphic health warnings on tobacco products packaging in 2008. It concluded that graphic warnings on cigarette packs are not only effective in communicating the health effects of smoking and improving consumer knowledge as a result, but they are also helpful in discouraging the uptake of smoking and preventing relapse as well. [4] Another study conducted in the U.S. concluded that the images of diseased smokers help smokers heed to the health warnings about smoking. [5]

Based on a similar litigation in Australia related to the Plain Packaging Act, we do not expect a positive outcome for the tobacco industry or Philip Morris in this case. This is not good news for Philip Morris as Thailand is one of the four primary growth markets for the company in Asia, the other three being Indonesia, Philippines and Vietnam. In 2012 Philip Morris reported a shipment volume growth of 4.2% in Asia, which was primarily driven by market share gains in these four growth markets, partially offset by volume declines recorded in Japan and Korea. [6] If the new law, which is scheduled for implementation on October 2nd 2013, is effective in reducing adult smoking rates in Thailand, it will directly impact Philip Morris’ top-line growth from Asia and might also inspire other countries in the world to take similar measures.

We currently have $84 price estimate for Philip Morris International, which implies ~5% downside to the stock from its current market price.

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Notes:
  1. Philip Morris Sues Thai Government Over Cigarette Packaging, wsj.com [↩]
  2. Japan Tobacco sues Thailand over cigarette packaging, www.channelnewsasia.com [↩] [↩]
  3. Switch to large pictorial health warnings on cigarette packs, bmj.com [↩]
  4. Evaluation of the Effectiveness of the Graphic Health Warnings on Tobacco Product Packaging 2008, health.gov.au [↩]
  5. Graphic warning labels on cigarette packs ‘work better’, bbc.co.uk [↩]
  6. Company SEC Filings, pmi.com [↩]