pmi - reduced-risk products - june 26, 2014

Investor Day – Reduced-Risk Products

Lausanne, June 26, 2014

Bertrand Bonvin

Senior Vice President, Research & Development

Manuel Peitsch

Vice President, Biological Systems Research

Frederic de Wilde

Senior Vice President, Marketing & SalesNote: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce individual risk and population harm

Reduced-Risk Products is a Consumer Category of its Own

2

Fast-Moving Consumer

Goods for Adult Smokers

Scientific

Substantiation

Electronics

Consumer

Electronics

Reduced-Risk Products ("RRPs")

Platform 1 Platform 2 Platform 3 Platform 4

Heated Tobacco Products Nicotine Containing Products

Note: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce individual risk and population harm. The RRPs depicted are subject to ongoing

development and therefore the descriptions are illustrative and do not necessarily represent the latest stages of product development

Leadership in Reduced-Risk Products

3Note: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce individual risk and population harm. The RRPs depicted are subject to ongoing





RRPs

Regulation

R&D and

Scientific Substantiation

Marketing and

Commercialization

Agenda

● R&D capabilities and assets

● RRPs portfolio

● Scientific substantiation

4Note: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce individual risk and population harm

Best-In-Class R&D Capability in the Industry

● PMI’s long experience in RRP

● Since the spin, PMI has significantly enhanced its R&D capabilities

● Invested approximately $2 billion

● Hired over 300 scientists with deep expertise in key fields


PMI R&D Centers and Global Partnerships Network

6

Technology and Scientific Network (2014)

2 R&D Centers

Major partners and service providers

RRPs Development and Scale-up

● Heat-not-burn consumables:

- Internally developed and manufactured

- New factory (30 billion units by the end of 2016)

● Devices:

- PMI’s technology developed with external partners

- Scale up and manufacturing by third-party

- Manufacturing for pilot launches commenced

Bologna, Italy

7Note: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce individual risk and population harm. Visual execution is for illustrative purposes only

Long-Term RRPs Pipeline

● Portfolio of over 500 granted patents worldwide

● Pipeline of around 1,000 pending patent applications

● Basis for long-term RRPs pipeline to address range of adult smoker

preferences


Developing Robust Evidence to Support a Claim of Reduced Risk

● Leading RRPs science

● State-of-the-art product assessment

● Sharing and collaborating with the scientific community and regulators

● 80 peer-reviewed scientific publications

● Clinical studies registered on ClinicalTrials.gov


Agenda


● RRPs portfolio



RRPs: Our Product Platforms

11

Platform 2Platform 1


Platform 3 Platform 4



Platform 1: Precisely Controlled Electrically-Heated

Tobacco System

● Heater maintains tobacco temperature below combustion

● Custom designed HeatStick tobacco stick

● Aerosol delivers volume, flavor and satisfaction

12Source: Baker R. R., 1975, High Temp. Sci., 7, 236-247 and PMI Research & Development

Platform 2: Heat-Not-Burn with Combustible Cigarette Ritual

● Pressed carbon heat source

● Tobacco temperature control by design:

- Physically separated to prevent tobacco combustion

● Proprietary blend & flavor system

● Plan to start clinical studies in 2014

● Manufacturing synergies with Platform 1

● City launch in 2016

13

Platform 2

E-Vapor Products

● Current e-vapor product challenges:

- Satisfaction

- Consistency

- Manual manufacturing

● PMI’s approach:

- Enter e-vapor product category in 2014

- Develop innovative NCP delivery technology addressing current challenges

14

Platform 4: Innovative Technology

● Novel aerosolization technology:

- Proprietary cartridge-battery combination

- Improved e-liquid

- Automated manufacturing

● Consistency of aerosol delivery

● Nicotine delivery profile superior to existing products

● Pilot city test in H2, 2016

15

Platform 3: Effective Delivery of Nicotine Salt Aerosol

● Product development on-going

● Organic acid and nicotine contained in separate sections

● Nicotine salt is formed in a visible aerosol

● Provide nicotine delivery and satisfaction similar to combustible cigarettes

● Initial pre-clinical testing ongoing

16

Platform 3

Agenda


● RRPs portfolio


17

● Developing robust evidence packages based on state-of-the-art science and

best in class data

Post-Market Studies

& Surveillance

Consumer Perception and

Behavior Assessment

Substantiating Reduced Risk

18

Reduced Risk in Laboratory Models

Reduced Exposure & Risk

Reduced Population Harm

Reduced Toxicity in Laboratory Models

Reduced Formation of HPHCs

Clinical Trials

Systems Toxicology

Assessment

Standard Toxicology

Assessment

Aerosol Chemistry and

Physics

Product Design and

Control Principles

Note: HPHCs stands for Harmful or Potentially Harmful Constituents


19


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance





Reduced Formation of HPHCsProduct Design and

Control Principles


20

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance







21

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance







22

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance







23

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance







24

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance






Cessation: The "Gold Standard"

● We apply the US Institute of Medicine’s "gold standard" for assessing risk

reduction: comparability to cessation

25

Time

Dis

ea

se

Ris

kPoint of

Intervention

From

Epidemiology

Note: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce individual risk and population harm. The descriptions in the chart are for illustrative

purposes only

Source: IOM (Institute of Medicine), 2012, Scientific Standards for Studies on Modified Risk Tobacco Products. Washington, DC: The National Academies Press



Manuel Peitsch

Vice President, Biological Systems Research

Note: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce individual risk and population harm

Evidence Package

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance






27

28

0

10

20

30

40

50

60

70

80

90

100

Aerosol Composition(a): Relative Amounts Reported on a Nicotine Basis Compared to a

3R4F Reference Cigarette (%) Laboratory Filter Pad

Combustible Cigarette

Laboratory Filter Pad

Platform 1

Platform 1 Platform 2

Combustible Reference Cigarette

(a) Aerosol collection with Intense Health Canada’s Smoking Regime (55 mL puff volume, 2 second puff duration, 30 second interval puff)

(b) < LOQ in Platform 1

(c) < LOQ in Platform 1 and Platform 2

(d) < LOQ in Platform

Note: These data alone do not represent a claim of reduced exposure or reduced risk. LOQ refers to the Limit of Quantification

Source: PMI Research and Development

Reduction of HPHCs in Platform 1 and Platform 2 Aerosols

Evidence Package

29

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance






7.4 9.612.8 11.6

0%

50%

100%

3R4F Regular Menthol

Reduction of Toxicity in Heat-Not-Burn Platforms

● Compared to combustible cigarette smoke:

- reduces biological activity (in vitro / in vivo)

30

Cytotoxicity Relative to 3R4FMean ± SE

TPM

GVP

Platform 1

Genotoxicity Relative to 3R4FMean ± SE

0

200

400

600

1,000 2,000 3,0000

TPM (µg/plate)

Number of

Revertants3R4F

Platform 1 Regular

Platform 1 Menthol

Note: These data alone do not represent a claim of reduced exposure or reduced risk. 3R4F reference cigarette. TPM refers to Total Particulate Matter. GVP refers to Gas Vapor Phase



Systems Toxicology-Based Risk Assessment

● Integrated large scale molecular measurements with advanced computational

models of disease mechanisms

● Ability to quantify the perturbation of the core mechanisms leading to disease

31

Cigarette Smoke

InflammationCell

ProliferationCell Stress ApoptosisDNA Damage Necroptosis SenescenseAutophagy

Biological Networks

Month 1 2 3 5 Month 7Start

Note: CC is a 3R4F reference combustible cigarette


Compare Heat-not-Burn Platforms with Continued Smoking and

Cessation in Mouse Model: Impact on Disease Mechanisms

32

Platform 2 Prototype

CC

Platform 2 PrototypeCC

AirCC

Air


Cessation

Switching

Platform 2 Prototype

Reference: Air

Month 2 Month 7Start

Group Exposure



33

Platform 2 Use

1

Time (months)

2 3 5 7

Note: These data alone do not represent a claim of reduced exposure or reduced risk. Prototype of Platform 2



Cessation

Combustible Cigarette Use



34

Platform 2 Use

1

Time (months)

2 3 5 7

Note: These data alone do not represent a claim of reduced exposure or reduced risk. Prototype of Platform 2



Cessation



Platform 2 Prototype (Switching)

Note: These data alone do not represent a claim of reduced

exposure or reduced risk. Prototype of Platform 2




35


Cessation



Platform 2 Prototype (Switching)

Platform 2 Prototype Use

1

Time (months)

2 3 5 7



36

0

10

20

30

CC Cess. Switch. Air P2

Cell Changes:

Inflammation

Total Cells

(x105)

0

1

2

3

4


Emphysema

Index


Physiological Changes/Disease:

Lung Function

Relative Loss of

Lung Function

Tissue Changes:

Lung Emphysema

After 7 months After 7 months After 7 months

Note: These data alone do not represent a claim of reduced exposure or reduced risk. Cess. is Cessation, Switch. is Switching and P2 is Platform 2 (Prototype)


Evidence Package

37

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance






PMI’s Approach to Clinical Assessment

38

Clinical Assessment

Reduced ExposurePharmacokinetics /

PharmacodynamicsExposure Response

Measures:

Nicotine Uptake

Subjective Effects

Measures:

Biomarkers of Exposure

Clinical Risk Endpoints

Measures:

Clinical Risk Endpoints

Product Use

1 2 3

1 week in a clinic1 week in a clinic

3 months at home6-12 months at home

Platform 1 Clinical Assessment: Pharmacokinetic

Preliminary Results

39

Platform 1

Combustible

Cigarette

0

2

4

6

8

10

12

14

16

18

0 10 20 30 40 50 60 70 80 90 100 110 120

Nic

oti

ne (

ng

/mL

)

Time (min)

Nicotine Pharmacokinetic Profile

Note: These data alone do not represent a claim of reduced exposure or reduced risk

Source: PMI Research & Development

Platform 1 Clinical Assessment: Reduced Exposure

Preliminary Results

40

3-HPMA levels Geometric Mean 3-HPMA (ng/mg creat, [95%CI)

MHBMA levels Geometric Mean MHBMA (pg/mg creat, [95%CI)

Acrolein 1,3-Butadiene

COHb levels Geometric Mean (%; [95%CI])

Carbon Monoxide

S-PMA levels Geometric Mean S-PMA (pg/mg creat, [95%CI)

Benzene

Mo

no

hyd

roxy

bu

ten

ylm

erca

ptu

ric

acid

(p

g/m

g cr

eat)

0

500

1000

1500

2000

2500

3000

3500

4000

Baseline Day 1 Day 2 Day 3 Day 4 Day 50

1

2

3

4

5

6


0

200

400

600

800

1000

1200


0

500

1000

1500

2000

2500

3000

3500


Car

bo

xyh

emo

glo

bin

(%)

S-p

hen

ylm

erca

ptu

ric

acid

(pg/

mg

crea

t)

3-h

ydro

xyp

rop

ylm

erca

ptu

ric

acid

(ng/

mg

crea

t)

Switched to

Platform 1

Continued smoking

Quit during study

Note: These data alone do not represent a claim of reduced exposure or reduced risk


● 160 adult smokers

● Confined & Ambulatory

● Exposure to harmful and potentially harmful

constituents, product use

● Multiple countries and ethnicities

Platform 1 Clinical Assessment: Reduced Exposure: Ambulatory

and Exposure Response Study

41

● Primary endpoints: 5 biomarkers of exposure

● Secondary endpoints: additional biomarkers

of exposure and clinical risk endpoints

Reduced Exposure Studies

(3-month Ambulatory)

● Primary endpoints: 8 clinical risk endpoints

● Secondary endpoints: additional biomarkers

of exposure and clinical risk endpoints

● 950 adult smokers

● Ambulatory

● Changes in clinical risk endpoints, functional

health markers and blood chemistry, product

use

● Multiple ethnicities

Exposure Response Study


Evidence Package

42

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance






Consumer Perception and Behavior Assessment

● Based on FDA guidance

● Designed to assess consumer perception and understanding of RRPs

● Assess label, labeling and marketing material

● Assess intent to use among adult consumer groups

● Progressing according to plan


PMI’s Post-Market Assessment

● Surveys and surveillance to:

- Understand how product is used

- Monitor spontaneous health events (safety surveillance)

● Under development; to be initiated as of pilot market launch

44

Evidence Package

45

Product Design and

Control Principles


Physics

Standard Toxicology

Assessment

Clinical Trials

Systems Toxicology

Assessment


Behavior Assessment

Post-Market Studies

& Surveillance






Reduced-Risk Products: R&D

46

R&D and Scientific Substantiation

• Ready for RRPs era

• Strong product portfolio and innovation pipeline

• Industry-leading risk assessment capabilitiesRRPs

Regulation

Marketing and

Commercialization


Reduced-Risk Products: Regulation



RRPs

Regulation

R&D and


Marketing and

Commercialization





● Advocating rigorous regulatory standards, which can provide:

- Assurance to regulators and the public

- Confidence for consumers

- Clarity for the marketplace

● Momentum for evidence based RRPs regulation

48


● US FDA:

- Statute and MRTP Draft Guidance

- "Deeming Regulations"

● EU Tobacco Products Directive:

- E-cigarettes regulated as tobacco-related products

- "Novel Tobacco Products"

49

Reduced-Risk Products: R&D

50

RRPs Regulation

• Uncharted territory

• Can provide assurance to

regulators, public and

consumers

• Clarity for marketplace

• PMI well-positioned

R&D and Scientific

Substantiation

Marketing and

Commercialization




Frederic de Wilde

Senior Vice President, Marketing & Sales


Reduced-Risk Products: Commercialization



RRPs

Regulation

R&D and


Marketing and

Commercialization




Commercialization of RRPs

● Evolution of E-Vapor Product market

● PMI’s RRPs portfolio

● PMI’s Platform 1 commercialization



Evolution of E-Vapor Products Market

● Changing the dynamics of the industry

● Classified as medicinal or prohibited product in more than half of OECD

markets

● Growth driven by adult smokers’ desire for Reduced-Risk Products, but also

by:

- Lower price particularly for e-liquid products

- Convenience, less smell, no ash


Evolution of E-Vapor Products Market

● Some markets dominated by e-liquid products – rechargeable "tanks" with

nicotine containing liquids – whilst in others "cartomizer" products are leading

● Wide range of penetration levels in various markets

● High interest but potential of the category currently limited by:

- Lack of taste and sensory satisfaction

55

"Cartomizer" Products "Tank" Systems / E-liquids

Maturity Levels of E-Vapor Markets

● Mature markets:

- UK (7.8% adult smokers used an e-vapor in the past 7 days), Poland (4.9%), Italy (3.5%)

● Developing markets:

- France (11.9%), Spain (2.0%), Denmark (7.6%), Netherlands (3.8%)

● Low penetration markets:

- Germany (0.4%), Austria (1.2%)


Source: PMI RRP Market Research (% of adult smokers using e-vapor products in the past 7 days)

5

15

3

0

16

79

96

70

100

13

39

10

40 Trial

(past 12 months)

Awareness of

e-vapor products

Italy: Adoption of E-Vapor Products

57

(% of adult smokers)

Purchase

(past 12 months)

Usage

(past 7 days)

Oct Nov Dec Jan Feb Mar Apr May Jun Sept Oct Nov Dec

20132012

Note: n ~ 2,300 for each wave

Source: PMI RRP Market Research (3 months moving, no fieldwork in July and August)

● E-vapor is a product category which is here to stay

● The category will continue to grow at different rates depending on the market

specificities and product improvements

● Excise taxation will probably be implemented

● E-vapor products do not fully respond to evolving preferences of adult smokers

● Innovation will be a key driver for the evolution of the e-vapor products

category

A portfolio approach with different product options is required to

address emerging preferences of adult smokers

58

E-Vapor Market: Conclusions

RRPs Commercialization








Source: PMI RRP Market Research 60

Importance of satisfaction

PMI’s RRPs Portfolio Addresses Adult Smokers Preferences and

Market Opportunities

P4 like

Openness to departure from cigarette flavor and ritual

61





P1 like

P4 like

Openness to departure from cigarette flavor and ritualNote: Reduced-Risk Products ("RRPs") is the term we use to refer to products that have the potential to reduce individual risk and population harm. The RRPs depicted are subject to ongoing


Source: PMI RRP Market Research

P2 l

ike

62




P1 like

P4 like




P3 like

P2 l

ike

P1 like

63


P4 like






100%95%

36%

17%

3%

9.18.7

3.3

1.5

0.4(a)

AdultSmokers

Awareness ofE-vapor Products

Trial(past 12 months)

Purchase(past 12 months)

Usage(past 7 days)

Italy: Adoption of E-Vapor Products

64

(million adult smokers)

(a) Includes all users of tobacco products in the past 7 days

Note: Number of adult smokers: Italy n ~ 2,300

Source: PMI RRP Market Research (3 months-moving average, February 2014 – April 2014)

Italy: Size of the Opportunity

65

e-vapor product users

Platform 4 No

To

bacco

0.4

# of Adult

Smokers

(millions)

• Current generation taste

satisfaction

• Electronics

• Convenience, less smell, no ash

• Price advantageNote: The RRPs depicted are subject to ongoing development and therefore the descriptions are

illustrative and do not necessarily represent the latest stages of product development. Number of adult smokers: Italy n ~ 2300



66

Tried and rejected

e-vapor products


Platform 1

Platform 4 No

To

bacco

To

bacco

3.0

0.4

# of Adult

Smokers

(millions)

• Taste satisfaction


• Electronics


satisfaction

• Electronics





Aware of but did not

try e-vapor products


67

Tried and rejected

e-vapor products


55.0%

Platform 1

Platform 4 No

To

bacco

To

bacco

5.4

3.0

0.4

# of Adult

Smokers

(millions)



• Electronics


satisfaction

• Electronics






try e-vapor products



• Cigarette-like ritual

Platform 2


68

Tried and rejected

e-vapor products



• Electronics

Platform 1



satisfaction

• Electronics


• Price advantage

Platform 4

55.0%

No

To

bacco

To

bacco

5.4

3.0

0.4

# of Adult

Smokers

(millions)

Note: The RRPs depicted are subject to ongoing development and therefore the descriptions are




try e-vapor products5.4



• Cigarette-like ritual


69

Tried and rejected

e-vapor products3.0



• Electronics

e-vapor product users 0.4

# of Adult

Smokers

(millions)

55.0%

Platform 2

Platform 1

Platform 4

Platform 3

Next Gen. Platform 4• Improved taste satisfaction

• Electronics


To

bacco

No

To

bacco


satisfaction

• Electronics





RRPs Commercialization






(Approximately 45-second video)




Video

Introducing The System

Note: Reference images only 72

Kit Packaging

73Note: Reference images only

Note: Reference images only

Kit Packaging

74


Kit Packaging Components

75

76

Components Line-Up


Device Color Customization


Marlboro HeatStick: Tobacco Sticks Specially Designed for


79

Marlboro HeatStick: Tobacco Sticks Specially Designed for


Communication and Commercialization

● campaign

● Leverage current infrastructure

● New capabilities and channels

80

Visual Not Shown

Communication and Commercialization

● campaign

● Leverage current infrastructure

● New capabilities and channels

86

Leverage Current Infrastructure

● Ensure product availability in C-stores and general trade

● Traditional media to boost awareness

● Leverage existing touch points

● Develop engagement activities to enable longer interaction

87

Visual Not Shown

New Capabilities and Channels

● Digital Platform:

- 24/7 online platform providing end-to-end service

• Integrated e-commerce platform for adult consumers

• Video tutorials, hotline, troubleshooting, FAQ

• Testimonials

● Customer Care:● Personalized, multi-channel customer support center

● Electronics:● Logistic and distribution infrastructure

91

E-Commerce

Mobile App


: Launch Plan

● shows high potential to address the emerging preferences of adult

smokers

● The system and Marlboro HeatSticks tobacco sticks manufacturing

has started

● will be introduced in two test cities in Q4 2014, one in Japan and one

in Italy

● National expansion starting in 2015 and launch in other markets planned

● Commercialization toolbox developed for all relevant channels

92

93

Platform 4

Platform 4: Commercialization Plan

● Agreement with Altria to commercialize their products

● Invest in the development of second generation products for global expansion

● Enter the category starting in the second half of 2014

● Explore acquisition opportunities that could accelerate the achievement of

significant presence in certain markets

94

95Source: Company websites, PMI estimates and Nielsen

Nicocigs: Company Information

● Founded in 2008, based in Birmingham

● Strong market position in the UK & Ireland

● Excellent supply chain capability

● Skilled and well trained marketing & sales teams

● Nicolites: company’s main brand:

- 26% YTD April Retail SoM

- Present in more than 20,000 POS

Reduced-Risk Products: Marketing and Commercialization

96

Regulation

Marketing and Commercialization

• A strong RRPs portfolio to address all adult smoker

preferences

• New city launches in Q4, 2014

• Entered e-vapor in 2014 / Nicocigs acquisition

R&D and

Scientific

Substantiation


Reduced-Risk Products: Conclusions

97

RRPs

Regulation

R&D and


Marketing and

Commercialization








Questions & Answers


Reconciliation of non-GAAP measures included in this presentation

to the most comparable GAAP measures are provided on our

website at: www.pmi.com/2014InvestorDay/RecSlides

Glossary of Terms: www.pmi.com/2014InvestorDay/Glossary