Slide 1 Reduced Risk Products B?e?ng Slide 2 Agenda - Competitive landscape PMl's plans - Assessing reduced risk products Regulatory framework Taxation of reduced risk products Slide 4 Emerging market for wide range of nicotine products Ccnvanzionai N?mrine Pr-J?urts Hitcl'um Rap C-gzrarlv. L-pumnl?ns . Slide 5 70h ?cu Flwuc? him-VIC" Gulpmd - MM A Pratkmn 1 F'latl'mm 2 Platform 3&4 .JTI 6? A . a --. BAT ?nal 1 i: I -. (NC-am? 1I . - Vex? ill?ll?l?l'ii?ll JTI Immediate focus is on its heated tobacco product: Ploom Austria, Italy, Korea, Japan - Week of 14 April test launch in France Product assessment strategy unknown Participation in the UK e?cigarette market expected BAT Immediate focus is on nicotine products: e-cigarettes and NRTs, Background - Acquired CN Creative (lntellicig) in December 2012 for 40Mio - Launched Vype in the UK in July 2013 - In addition to the e-cigarettes, Voke (a nicotine inhaler) to be commercialized in the UK - Already applied for a Marketing Authorization (MHRA) Marketing Activities - TV commercial (?3.6Mio investment Spent) - Vype social bar - Social media marketing Pie-?Clinical for e~cigerettee; Clinical eeseesment for NRTS Heated tobacco preducts likely to be under development Ceuld potentially have access t0 the Reynolds technelogyipreducte Slide 6 E?Cigarette: Market Development Giobnl Retail Turn aver (U 55PM) H311 2013! 'Restotlhowo?d lm?ia Ph?'cvinee Maelwia] JCK Chen. Kama Sou-we. MaknExmre: Emma? mma?v. KJ-hor lama?!) mm. inausiraom?s. Inmraa?mras -.-. -: 2% of cigarette volume in Slide 7 Major Competitors US International Altria Lorillard BAT a i -n i a v4.1 5 . gm 5 Giffg?gole mu Puritans Reynolds NJOY i No known 45 activityu: i data Vase Vypa Slide 8 E-cigaxette Maturity Curve Par erku Size nem?vu ragla?on Low Traction! New MomeMurlI Markus Markus A .1 Mark-ta I -FM9m-qu'pmumkm lah?vamapuli Imemduu?tqua?y u mmuom cm ~L mkudaalosdum I ?umol?iairirrmkingmbih - Prism Woks Wes pabennu muons Harm - PWI in general trade and d'vfforo?iahn gl alumni. vim-um - I wanna has mun-tw- I 'Chrrauulahm lumen limo! fdlomnq I by the regular; mam 50m mum mpg. Km Assoc-um malaria (madam-n Studios-on tho GW?Emnlm Emmy?Jan 2014 - - - . - .. .A.. Slide 9 What is an e?cigarette? I WK .- E?cigarette is a battery powered device which produces an inhaiable aerosol by the evaporation of a flavored nicotine solution. It is the first modern Chinese invention since Porcelain in the 18th century, so in the last 300 years. We started seeing the initial models in China in 2004 and 5 and 2006 in Europe and 2007 in US. The original design was done by a Chinese Inventor named Hon Lik and contained three pieces: a cartridge acting as a reservoir, an atomizer which may be called as the engine and a battery and electronics part for providing the power to the engine. Slide 10 E-Cigarette: Sourcing - Shenmen (China) emerged as an eACigarette manufaciun?ng hub starting from 2006 - More than 100 manufacturers - The same modelidesign produced by multiple manufacturers - Major e-quuid manufaclurers being established in the USIEU mu- Slide 11 Types of E-cigarettes I am Popular In tho US. UKa?d Ru BEIE only} A Pan-"gr I Diana?s-able I Cartridge I I E-[IqLuid v? 5?5 whim I . .1 s; all! eel!- 50/50 turnover split Slide 12 on-refillable pro duct g" Weaknesses - Low cost of device {trial} Expensive re?lls - Simple to use i re-use - Limited personal customization - Relatively more consistent performance - Look-alikes perceived as a "fake" - Easy to carry and handle Cigarette - Limited ?avor i' nicotine range - Limited battery poweriI shorter charging cycle Fresh atomizer each time Economic model "Razor blade" Device sold at no pro?t:l loss (decreasing prices. intense promotional activity) Re?lls as the source of pro?t Fast moving product - Suitable for General Trade - Product differentiation Future: ?power of brands" Slide 13 Re?llable product 1 Weaknesses - Cost ef?cient (in case of extended use) - Initial cost (expensive devices) - Personal custom ization - Large variation in performance - Range of?avors and nicotine - Cumbersome to re?ll I handle - More powerful batteries 1? longer - Leakage charging cycles . Risk of overusing the atomizer Economic model - Hardware sales is the major source of tumover First~time purchasers (erg. trial} drive the turnover Viability is a challenge as the market matures replacement market} - Complex product system Dedicated retail network: mushrooming of e-cigarette shops in the early stages - Little room for product differentiation Price-based competition Slide 14 E-liquid business: Major challenges - No unique match between the device and consumable (?open source") - Commodity product with limited room for differentiation Price-based competition - Low manufacturer margin USS 0.2 per ml of e-liquid vs. 0.8 for cartridge - 'l'irnei'resources required for in-deplh trade and consumer training - Dif?culty to merchandise i sell All major players (Aliria, Reynolds. Lorillard. BAT and imperial) focus on cartridge products This slide is meant to address why we cannot operate with the e-liquid model. First there is no unique match between the device and the consumable. The product is a commodity and there is almost no room for differentiation. The margins are very low and getting even lower. The consumers need to be trained heavily to use e-liquid products And tobacconists, our main channel; cannot sell these products; they simply do not have the time to train the customers. And all the major tobacco companies are driving the cartridge products where they can create a room for differentiation. Slide 15 E-cigarette Marketing: Messages - Main focus on category bene?ts ("functional bene?ts?) Reduced exposure Hygienic aspects (no ash. no smell] Cost savings Ability to smoke anytime, anywhere A new, trendy way at "smoking" - To a lesser extent. focus on the USPs of the product Look 8- feel (eg. weight, soft tip. etc.) Puff?by?pulf consistency and taste Quality assurance manufacturing origin) - More recently, leading players started to focus on brand building ("emotional bene?ts") Potentially mowing towards a "multi-brandi?channel strategy? Slide 16 E-cigarette: Performance Challenges Adjustment in smoking behavior required ("learn to vape") poor nicotine delivery' among subjects with no prior vaping expenence Lack of "immediate" satisfaction arti?cial taste. smoke volume, throat impact - Quality concerns and variation in product performance battery performance. leakage. ingredients ?m mummi? an: . u- r: I?ul ?I?no I ll .. i .. Slide 17 Cigarettes - The majority of e-Cigarette users continue to use conventional cigarettes - On average. duai users consume 12 conventional cigarettes with 5 e-cigarette usages per day - Many do not stay with the product over a long period of time Most e-Cigarette Users Continue to Use Conventional May 2013 Slide 18 Agenda Competitive landscape PMl?s plans - Assessing reduced risk products Regulatory framework - Taxation of reduced risk products Slide 19 Reduced Risk Products Tobacco Products Nicotine Products . Heated tobacco - Heated tobacco - Technology A'me-Ioa' acquired from the ?93359 unit a do Duh - ?Dr to D-?u an Pm ed car Product WM pa Iallyd 9 ed on.? Ignited de me I .coplu the to and plug got imam b? heated .led if - Charm an ng a con?rmed 1.0 at 3 mg nl wil nbacco bl nd combustion ?amru?wm Nu: one to sun Sumlnrae owl to armed b-l-e alang l. affar: more aerosol ilu -- Daugnad line Inbaccn amorath the satisfaction :11 lawn go In mull? /1 .- ., Kev principles - Specially designed consumable ?Tobacco plug which generates visible aerosol and offers satisfaction ?Tobacco blends and flavor systems developed to suit lower operating temperature - Heating engine precisely controlled using software ?Tobacco rapidly brought to minimum temperature remaining above it for the duration of the smoking experience never exceeding maximum operating temperature, regardless of how it is consumed -Heater maintains tobacco temperature in the distillation range wl-leater also acts as a temperature sensor i Heat source is a Key differentiation -- Pressed carbon, once ignited heats the tobacco plug Physically separated to prevent tobacco combustion -- Physical specifications controlled to maintain performance m- Sirnilar aerosol to Platform 1, but offers more convenience Product development ongoing i Organic acid and nicotine contained in separate sections 9 Nicotine saii is formed in a visibie aerosoi 1? Designed to ensure nicotine detivery and satisfaction similar to conveniional cigarettes Slide 20 4 platform spaces available Openness la 3 mm munmaslo Platform 3 Platform 4 Conan-alum Platform 2 Platform 1 Lnyally tn CC expenanca Slide 21 PI Commercialization 1014-2015 2017 2018 Top 5 Market: City Launches {1014/2015} Potential commerdal deployment tannins) Next Markets Him-month after Remaining markets Top 50 markets (volume) ir RRP Market complexity Product regulation Distribution Communication Sale Competition Economical, political legal environment Market attractiveness Size Profitability Likelihood of success NGP benefits interest Taste interest Technology interest Novelty interest Fit leverage Top 20 markets RRP pilot Top 5 markets Slide 22 mas}; 1hr: Inbauu shemsniw fur mantel: tza?mzm Fan and ?rm? m?iafm?isrn? wizh km emu-Ii? rars fin? Jena. am am. in Ew'etnmanz'i, it} A [Err-w, timers-r mar} immr (rim-r" . arm?? 23 ?12? Wm meatxl?). sw?Wzr?tv??k?mwmia?rvr?": 5 3? 51le- 51:49! #3 2-. mom?;- 9 ?Has. 25m Slide 23 Objectives and Strategy Establish PMI as the leader in the category in lead markets by the end of 2016 1. Enter the category with Altrta product in 2-3 lead markets a to develop a ?rst-hand understanding of the category dynamics to help shape the regulatory debate to establish the reference equity brand(s) in the e- cigarette category to develop new capabilities 2. Explore acquisition opportunities which could accelerate the achievement of signi?cant presence in certain markets 3. invest in the development of the new generation product for global expansion Slide 24 Altria Strategic Agreement - A set of licensing. supply and cooperation agreements - MarkTen made exclusively available to PMI for commercialization outside the US Right to use trademark. packaging, commercial plans and supply chain - Further cooperation on scienti?c assessment. regulatory engagement and authorization - Right to negotiate for the international division or product rights of an e-clgarette business acquired by Altria Green Smoke} Slide 25 Green Smoke Background Market Presence - Founded In 2003 and headquarlercd In - US: malnly an nnhne ptayar Mlarl'i 9016 am: total revenue RED cantar In lures! 6-755 Onllne 50M [Estimtad] - 140 employees {40 the - Muuimd by Alina In January 20 I4 [or I 10 Avanahle onhne In 25 EU rrInrke'ls as well as MID In cash and up In 520 Mm ll'l Inmn?llw Ukralna. Serbla, Switzerland. Norway and payments South Nn'ca $410 Mn: revenue In 2013 - Salls Ina Manda?! U5 prode Prod portfollo Mark eilnn Activities Non-m?llablo products; pramum prlce - No visibie markeh'ng activity pmltiorving. 9 Ham?; Cndridgus Dracuth $29119 - swans-pack: [amiable only?: - so CCE pm unII mm - Sm I 30 CCE scar: Conwv venue: "willer Slide 26 Development of the Next Generation E-cigarette Developmenlworkiniliated - Focus areas include Satisfaction (nicotine delivery pro?le. taste, consistency} Design for manufacturing (fully automated, cost improvement) End?of?life indicators (cartridge and battery) Charging case concept Cartridge recognition system - Product design completed: 03 2015 Product ready for commercialization: 03 2016 onwards Slide 27 Agenda Competitive landscape PMl's plans - Assessing reduced risk products Regulatory framework - Taxation of reduced risk products Slide 28 View on Harm Reduction Developing, assessing and commercializing reduced harm tobacco products is one of PMl's top priority: - Public health experts and the US. Family Smoking Prevention and Tobacco Control Act recognize that Modi?ed Risk Tobacco Products can reduce harm - Modifying conventional cigarettes that burn tobacco is unlikely to be effective in harm reduction POPULATION - -- - - - PRODUCT HARM ACCEPTANCE . AND USAGE Slide 29 Achieving Both Reduced Risk and Product Acceptability is Challenging A I Cam-mme cum- 5: tr) "cm'm" PMI Po?foho "noun. Thu-py' CONSUMER ACCEPTANCE Slide 30 Heating at Lower Temperatures Reduces Constituents Constituents a PyrolstiCon-ibusltion 50 00+ cu natiluu Product Temperature Principle - r- ~4no? Disliliaticni Controlled Pyrolysis a c- 500' -- -- -zoo - Distillation m. i 5m Target product space constituents . no _Aerosolization All constituents may be known Underlying Principles: Cigarette smoke is an aerosol of liquid droplets >5000 constituents identi?ed in conventional cigarette smoke Some of these constituents are categorized as harmful and potentially harmful Many of the are formed during combustion (burning) of the tobacco it is not known which are responsible for tobacco?related diseases selective reduction not an effective approach Slide 31 Assessment Strategy Post-Ma?aismhles' 8. Surveillance Demonstrating Reduced Po ulation Harm Clinical ma?. "ma-?r J. ?5 Demonstrating Reduced Exposure& Risk n. . Systems Toxicology Demonstrating Potential Non'cnmcal to Reduce Risk Standard Tochology Demonstrating Reduced Assessment Toxicity Pmcumcal Aerosol Chemistry and Demonslraling Potential Product Design and to Reduce Exposure Control Principles Objective is to demonstrate that, compared to a cigarette, reduced risk products ?do not introduce new hazards ?substantially reduce harmful and potentially harmful constituents reduce biological activity (in vitro in vivo) Tests based on OECD guidelines and pharmaceutical assessment programs: in vitro, in vivo and systems toxicology Slide 32 Assessment Strategy liq. r1 i' {Jr-m In,? Clinical Non-Clinica! Aerosol Chemistry and Demonstrating Potential to Reduce Exposure Slide 33 Difference Between Burning and Heating Conventional Cigarette Heated Tobacco [Burning] Product IZ?Dlmensmnal Gas Chromatography?Mass Spectrometry! Slide 34 Significant Reductions in HPHCE in Platform 1 Aerosol Compared to Conventional Cigarette Smoke Fonahbrevmied Rala?va amount compared in canvnnunnal :zgiratta [tilt] The graph compares the level of some harmful constituents, identified by the US FDA, in PMl?s reduced-risk tobacco product (Platform 1) to those in a conventional cigarette. Each substance is measured per mg of nicotine (that is why nicotine is at 100%). in a conventional cigarette. for the purpose of the graph, each constituent is at 100%. The level that is given for each constituent indicates the relative amount of that constituent measured from PMl?s product. For instance: Carbon monoxide Conventional cigarette: 100% Reduced-risk tobacco product: reduction of more than 95% Siide 35 Aerosol Composition 150 Smoking Regime Reference Cignrolto Piatform 1 I. ?od? . 11! lw?n-o ?12? t! - I Slide 36 Assessment Strategy Clinlcal Non-Clinical Standard Toxicology Assessment Pre?Clinlcal .l II .V. :3 Hm?. ?Knit Demonstratmg Reduced Toxicity Slide 37 Significant Reduction in Biological Activity Cytotoxicity and Genotoxicity u. ITOIICIIV Compared to :3 Conventional Platform 1 produces signi?cantly reduced biological activity in standard toxicological tests when compared to a conventional cigarette There is a substantial decrease in the in vitro cytotoxicity of smoke from Platform 1 FP03.1 as compared to conventional cigarette 3R4F. Preliminary experiments indicate a similar reduction for Platform 1 FPD4.2. Formal GLP studies are underway to confirm this. Slide 38 Assessment Strategy Clinical . Hr . I I 'l . Systems Toxicology Demonstrating Potential Non-Clinical . Assessment to Reduce Risk I -. -I.- Pre-Cllnical I-p Slide 39 How Does Biology Respond to Potential Reduced Risk Product Aerosols? Disease mg? Epidemiological evidence coso. Lung cancer! Chronic exposure to cigarette smoke is positively correlated with Adverse Outcomes Dis-motion ol 8 iolog ical Mediums Disease COPD. Lung cancer: Molecular It; I nger. Physiological changes Chronic exposure to cigarette smoke affects a number of biological networks assocrated with smoking-related diseases In a causal chain of Key Events known as Adverse Outcome Pathways ir SOURCE: Presented by Hoeng at Eurotox, 2 September 2013 Speaker notes: Our studies are complemented by parallel research which is building a mechanistic understanding of how exposure to cigarette smoke causes disease. By applying a combination of in vitro, in vivo, clinical and computational approaches, we believe that we can translate findings from the laboratory and from clinical studies into quantifiable measures of reductions in disease risk in smokers who switch to our reduced risk products. I will share with you several recent publications that show our advances in this field. Slide 40 Assessment Strategy Clinical ., (.1- CIWTW, 1-, 3.9;wa Non-Clinical Demonstraling Reduced Exposure Risk - -Su'.Slide 41 Approach to Clinical Assessment Clinical Assessment Pharmacuklnetlcs.? Exposure response [Ermgcodgnamlcs Maasurs: Measures: Smoking behavior Changes in blood Nicotine uptake chemistry Functional health and Subjective effects 1week'ln {Calais?J 3 months athome 6 months at home 1week In aclinlc Slide 42 [Disease Risk] cessation can substantiale risk reduction (10M Report. 2011) Substantiating Risk Reduction ll tot?) .. .., m? I . {Time} - The health risks of smoking and the reversal of risks after quitting smoking are well established and supported by epidemiological evidence (IARC 2004. 200?) - Demonstrating that to Reduced Risk Product is similar to smoking Slide 43 Substantiating Risk Reduction Cup in ?w Risk Asa-55mm! Smoking Disease Strong Epidemlologlc Evidence Strong Epidemlologlc Evidence MRTP Smoklng Disease Slide 44 Substantiating Risk Reduction Bridge but?!me Cpidcmiofagy mm?. Clinical Studies CC. Strong Epldemlologlc Evldonce .v -, . Short Torm Health Effects Smoking Disease Smoklng Dlsease Smoking Disease Slide 45 Exploratory Clinical Studies Conducted in 2012 Show a Similar Nicotine Absorption Profile of Platform v5. CC u- run?In- nun In ou?n?I Nah! Sludy used a prutu?lypa mun cl Piatl'nrm 1 Formal swans manta: min final umduc! #01780688, Slide 46 Platform 1 Satisfied Craving in a Similar Way to Conventional Cigarettes $017306?, Slide 47 Exploratory Clinical Studies Show Exposure Reductions m1 mu Dan Day: DirDl?l'l no hay: any) Dav! Dam Dly5 1evels CC and Platform S-PMA levels. CC and Platform 1 Hit Mann Emmi: Moan my] crud] Carbon monoxide ?-rmm 1600 SEE 2.5 we 2 'r 1.: no Dav-?1 Dave Dav] D371 my: Dav-I Days Dav-.1 Dwo Dayl Day]. Day] D311 D315 CC and P'a?om?l 1 MHEMA levels so and Platform 1 Gmic?oun mm (ugh; noun Slide 48 Substantiah'ng Risk Reduction Bridge fmhm'rm Epidemiology and Smoking-Related Diseases CC Strong Epldamlologlc Evidence Smoking Disease . Short Term ,5 Longer . kl - Health Tan-n mu. I 0115:3329 Effects EM Slide 49 The Effects of Smoking Cessation are Well Known and Can be Measured - gunman utc] A . 1 we" 1 ?it-w pressum and pubso deem-.1. SC (1233: cases to normal level . \l unplm-crj, :3 (.h?ngpj Honing Cu :mmow-r. 1mm: - ugh or Omduuvu all-:5: In I ['Izahuh'm .1. . I?m; l-?Ji' I - Smut: mmkc-rr'. I whltu b'uod urns mum dL-wzudua i HDL mum-j" uhnkn?dmnl) Inciunims?. - In - Inqyuvcd :n?ammatmv bicmalzuns - r253? .m-j any}. - Alias-1 ofhmg Eunciaon 3 - .--. Slide 50 Criteria for Clinical Risk Endpoints in MRTP Assessment Me as um I En dpo nt A?oclod by making Ital-us? Hal-lad lo swung-associated ?9 mm? 0 6 In I1 30an lo smelting maution? Foulblo In a Siudy of to 12 months? - Pre?Sulucnun Slide 51 Clinical Timelines- Platform 1 3- - Flaminth 2:313 am i 2015 3, 2016 132 a] 01:0: 02 03 mic: Q2 Q3 13?erqu :13 0-: . zi? Rammed ?d E: urn: Risk Pharmacokmelvc: 45Iudiar. 2 studies 2 slud?ts 5 3 Eapowlalupomo i I 1.: ..I I. r-m ?pm Slide 52 Assessment Strategy Post-Market Studlas 8- Surveillance Demonstrating Reduced Clinica? Consumer Pamep?on and Behaviot Assessment Non-Clinical Pre-Cllnical Slide 53 Assessing Consumer Perception and Behavior - Ensure consumers do not misunderstand the product and marketing communication 0 Observe consumer acceptance and switching behaviors to reduced risk products - Help predict consumer behavior once the product is marketed - Post?market monitoring and studies - Effect on tobacco use behavior among current tobacco users - Effect on tobacco use initiation among non-users - Effect of marketing on consumer understanding and perceptions - Effect on the population as a whole intended Audience: Quantitative studies conducted among adult smokers indicate that there is interest in Platform 1 90% of adult smokers comprehended that Platform 1 is intended for adult smokers who want to continue smoking Four?week usage study in Asia, large representative sample: - 54% of respondents declared a positive purchase intention - 30% of home usage participants adopted the product Non-Intended Audiences: Qualitative studies indicated that: Hypothetical product messages did not generate intention to use among adult never and former smokers The presence of tobacco helps the non-intended audiences to understand that Platform 1 is not for them Slide 54 Agenda Competitive landscape PMl?s plans - Assessing reduced risk products - Regulatory framework - Taxation of reduced risk products Slide 55 Agenda Regulatory Framework Harm reduction debate - Reguiatory frameworks for reduced risk products - PMl's objectives Slide 56 Harm Reduction Debate Driven by E?cigarettes E-cigarettes deliver nicotine with far fewer harmful chemicals than cigarettes E-cigarettes are a viable alternative to conventional cigarettes for many smokers E-cigarettes are used predominantly by smokers. while the use among non-smokers or minors is limited Hence, a growing number of public health experts recognize the potential of e-cigarettes as less harmful alternatives to conventional cigarettes Slide 57 Harm Reduction Potential - ?it all the smokers in Britain stopped smoking cigarettes and started smoking e-cr'garettes we would save 5 million dea?ls in people who are alive today. it's a massive potentiai public health prize. - BBC Interview.- .lnam BHIIJH. rheu? of the Royai Coilcge of F-?n-gsmians Tobacco Adwsow Sloop. Fol?ru3r?; All I '1 ash-u. Stetson-c cigarettes "i1the harm from smoking is caused almost exclusively by toxins present in tobacco released through combustion. By contrast, pure nicotine products. 2 although addictive, are considerably less harmful. Electronic cigarettes consequently represent a safer altematlve to cigarettes for smokers who are unable or unwilling to stop using nico?ne. ASH UK on e-oiqwulue Slide 58 CNS Concerns: KSFI UK, Davld B. Abrams e-cigs making smoking sexy again !4 . 4 Slide 59 WHO i FCTC Activity Focused On E-cigarettes - Promoting strict l? pharma?type regulation of e-cigarettes PreSentation to Members of the European Parliament E-cigarettes contain toxicants. no published studies demonstrating safety and ef?cacy. risk of nicotine poisoning from re?lls TE-cigareties] should be regulated through a two pronged approach as Dual use. gateway. defy smoke-free bum tobacco pfoducfs and as laws. re~nomla ize smoking maucrs to prevent a situation in which iooptmas are Involvement of tobacco companies exploited and ENDS escape oontroi? Focus in Asia i LatAm The most dangerous thing about this product is that the nicotine goes directly to the lungs white regular cigarettes have a ?ttei" (Philippines) Slide 60 WHO I FCTC Activity Focused On E-cigarettes - E?cigarettes deliver lower levels of most of the toxins found in cigarette smoke and may reduce disease burden caused by niCOtlT?le addiction - Offset by youth initiation. dual use. little benefits for cessation, and renormalization of smoking behavior - Regulatory recommendations: Same restrictions as for conventional c' areltes for public place use, minimum age, sale, venising Ben use of characterizing flavors Ban sci-branding, duel?use marketing Ban unsubstantiated cessation claims ulate e-cigarettes to set standards for produd onnancc In order to minimize risks to users and tenders. with [he fresh air as the relevant comparator, not cigarette smoke Address consumer re?llable e?cigeret?tes No country should be compelled to per-mil the sale of ecigarettes ?nun?I run It! (humu- il hit-uh Mun-I Slob-In Cum-u Slide 61 Agenda - Regulatory Framework - Harm reduction debate Regulatory frameworks for reduced risk products - objectives Slide 62 Novel Tobacco Products De?nition I no not fall in am existing product category i An: placed on the market ahnrentry into force of the Directive rum!ch 24, m4! 3 - Plating on the Market Obligatory noti?cation to national authorities 6 months prior to launch I National authurmu minnoducu "author'uation system? 5r Regulatory Regine - Depends on Product Caugorv Tobacco for Smoking I?mduct I I Tobacco product other than smokelm product - Products not involving combustion - MS may exempt from 55165 Hw sumo HW j- - 30:30 Hw Exemption from characterizing flavor ban I - Exemption from characlertzing flatmr ban I I I Provisions related to product presenth apply i Ban on comparative heallh claims on pack Slide 63 I: EU TPD:Nicotino Containing Products Nicotine-containing product' means a product usable ior consumption by consumers via inhalation. ingestion or in other lorms and to which nicotine is either added during the manufaclunng process or self-administered by the user before or during consumption Commission Doc?12 Products contoinirg more than 5 mgimnicotine regulatod by EU Medicines Directive Products below the threshold reguioled under [he Tobacco Products Directive - Different health warnings - Exempted from many provisions applicable to tobacco products Council (Member States] Juno '1 3 Products containing more than 3 mgiml [or 1 mg 93'; unit} of nicotine regulated by EU Medicines Directive Products bolow the threshold regulated under the Tobacco Products Directive Parliament Oct '13 Link to Art. 17 (noti?cation of noch tobacco products) Only products claiming therapeutic effect to be suizg'ect to Medicines Directive Nicotine ceiling aim Di?eront health warnings Min. ago of 1B for salo Flavorings explicitly penniitad Advartising restrictions as applicable to tobacco products Ban on use of tobacco trademarks Slide 64 E-Cigarette l) hate 2 Approach? Medicinal! Approach vs. TobaccoiGemral Products Approach Proponents Proponents - - - - Pharmaceutical Indule - E-Cigaretle Associations I TCAs I Harm reduction advocatm Arguments Arguments Need for medicinal Iegula?l'ron to ensure: of medicinal reguiatiun: Safu and e?octiva products I Too costly! -) equal to ban - Monitoring of lang tem1 a?ecis I Innovation slowed! campaiveness weakened I 'Demrmalization' of smoking I In many countries only soki in phannacies I Safety standards can be achieved by less restrictive regulation increased public debate about the right regulatory path Slide 65 UK: MHRA Proposal OTC Marketing freedoms Guidance Slide 66 . . nicor lte r-r? Ideally you should always aim to stop smoking. You can use nlcorane Inhalator to achlwe this by using it to completely replace all your cigarettes. in omer ways, smoke. family. Howwer nicoreue inhalator can also be used I If you feel unable to stop smoking completely. or wish to replace certain cigarettes and therefore I1 can help you to cm dawn me number of cigarettes you I at those times when you can?t or do not want to smoke. For example. - Where you don?: want to smoke and avoid harm to others eg children or Smoke free area; e_g Pub, won; public transport e.g aeroplanes. Slide 68 EU TPD: E-cigarettcs - Placing on the market as consumer product subject to the TPD unless classified as medicines due to presentation or function - TPD does not apply to products covered by Medicines or Medicinal Product Directives MS may regulate individual products as medicines on a case by case basis Test: (1) medicine by presentation (therapeutic claims} or (ii) by function (therapeutic purpose) MS that attempt to regulate all e-cigarettes as medicines likely to face legal challenge Slide 69 Notification to contain: List of all ingredients and emissions, incl. quantities, by brand Toxicological data regarding ingredients and their emissions, including when heated information on nicotine dosing and uptake Description of the components of the product, incl. the opening and re?ll mechanism Description of the production process, incl. series production EU TPD: Pre-market noti?cation six months prior to placing on the market Quality and safety standards consistent dose delivery] Max. nicotine strength of 20mgiml. max. cartridge size 2 mi, max. refill container size 10 ml Dedicated HW 30% Ban on comparative health claims (Art 13) Same EU advertising bans as for tobacco (TV. radio. print. electronic communications) No ban on use of tobacco trademarks (can be regulated at national level) No ?avor restrictions (national level) Requirements for monitoring of consumer preferences, adverse effects. reporting of sales volumes Member States can implement additional restrictions Member States can provisionally ban a given e?cigarette or type of e~cigarette if they could present serious risk to human health: EU Commission to determine whether such measure is justi?ed No additives creating impression of health bene?ts vitamins), stimulants caffeine), emission colorants, or carcinogenic, mutagenic or toxic additives Only high-purity ingredients allowed; other substances permitted in trace levels if unavoidable during manufacture Only ingredients not hazardous to human health in heated or unheated form allowed, with the exception of nicotine Consistent nicotine dosing E-cigarettes and re?ll containers are child? and tamper-proof, protected against breakage and leakage, and have a mechanism ensuring leakage free refilling Slide 70 United States -- sweat? of J. I..- .IAJAA )cur tonm about ilzr. buttli Input Juno 13:1 nimn; clmm? ?tuba (In I. L. - mam-r -- 1 I?L4ili .. . . . - L?sr: rm. finalizes his in saplar with: :16cm Food, Ding ar- . . that appiy in hhaun put-tun: gut/mitt: would uL?I-iirtniirlgilg annlv If; all any:rniuru pal-Jul: mam! labia: to I-DA picnurkn rum? :cqmulmm' HEN, U. FDA the authority In unlcitdc i-rhzr mic-1throw to uth lulu-xi:- pn'dunu. in addition to cigxcticn, il'l?L'iA dctamznutlzu \li to do :n to pron-.3. health mun-tin; ta ch:l.ltr.. WI: it'c Emu-tr; p.1?a?l??ityl3fCAI?lm?c?, min-Jr an: ?mini-In.- In and) nn.? fruit flu-via (antitrust mnfuru: uty HM tn ulcml I11 urn pm hint: that meet the Intuit-(y drl?mjuun uf?tulmn." lu?dun? 1ith ?1 inur- lin- [in-poem] tint-mum ml: in a ?ux unpaiwa out int-nu; an null-fur) inn-team dram}: and use intention to make public its plans for regulation later this year FDA letter published in April 2011 following the Sottera decision (which forbid the Agency from regulating e-cigs as pharmaceutical products because the nicotine in them were ?derived from tobacco), the FDA stated that it would extend the Agency?s tobacco product authorities to other categories of tobacco products and that those categories (e-cigarettes) ?would be subject to general controls such as registration, product listing, ingredient listing, good manufacturing practice requirements, user fees for certain products, and the adulteration and misbranding provisions, as well as to premarket review requirements for ?new tobacco products? and ?modi?ed risk tobacco products.? The FDA notes that the products covered will be considered new tobacco products requiring premarket approval if they were not marketed as of Feb 15, 2007 or were modi?ed after that date, it appears that the same date/standard for ?new products? as for conventional cigarettes will apply. Letter of 14 November to Attorneys General Slide 71 Family Smoking Prevention and Tobacco Control Act Premai?kcl aulhonzation for all new tobacco products An)" WSIplecllinu market as of Feb 200? nlm? 91:] aluminum. Requires clinicalI non-clinical evidenw New Products 7m Musl be ?appropn'ate for public health' P'ml' - FDA will consider impact an initiation. etc a" ?c ?a Claims based (explicit and implicit) mosaic. an?: ExpliCiIIy covars ?lighls' and media statements High bUrden of proof /\Must 'bono?t the population as a whole' 911(92] B11[u1] Reduced High burden of proof for reduced exposure claims substantial reduction in risk is reasonably likely to be established in subsequent studies magnitude in exposure reduction is substantial claim, which must be limited to formation/exposure claim, does not mislead consumers into believing the product is a reduced risk product Benefit of health of the population as Post~marketing studies and surveillance are required Consumers must comprehend advertising and labeling concerning modified risk and relative signi?cance of information High burden of proof for reduced risk claim ?as actually used by consumers will significantly reduce harm and the risk of tobacco-related disease to individual users and ?ibenefit the health of the population as a whole taking into account both users of the product and persons who do not currently use tobacco products.? a Draft guidance a Key areas of investigation regarding the effect of the Health risks Effect on tobacco use behavior among current users, initiation among nonwusers Effect of marketing on consumer understanding and perceptions Effect on population as a whole a Detailed considerations regarding recommended studies and anatyses Product analyses, nonclinical studies, clinical studies, computational modeling Postmarket saweitlance and studies Slide 72 Center for Tobacco Products - First new FDA center in 21 years - Funded entirely by manufacturer "user fees" - USD 1.1 billion since 2009 - Seven offices with 546 full-time employees Policy. Regulations. Science, Health. Communication and Education, Compliance and Enforcement Expertise and research (via grants} in epidemiology, behavior. biology, medicine. chemistry. toxicologY? addictions, public health, communications. and marketing - Works closely with other relevant FDA Centers Siide 73 Agenda Regulatory Framework - Harm reduction debate - Regulatory frameworks for reduced risk products - PMl's objectives Slide 74 Developing model legislation - What can we realistically achieve in the markets and by when? - Will legislators enact a law that authorizes claims? - Will laws establish a basis for regulations that permit claims? - While we are not seeking to replicate the MRTP legislation. how much of that law do we want? How much can we realistically avoid? Slide 75 What is a realistic timeframe? FDA Regulations: 1998 2012 H. I (I. .-.II ml ?lq'r?jrt'm by and kc-v 1m ltnl?l? Camp-um paws hcul?l ?mm? and Sr?nnfo Ln .1 =pn mg \iml um w.1n In: MRTP Guideline: 2012 I 5 CI unhm mtg: luv cram-yuan ?mm? "1 rm'm'm mumgl?usl ?mum: F39TC puns u? "1?me fku'nunyzu (1005-2004)] June 12- mag 5- I'm? no an'u?n duo ?xhnmen Imln Flu-h ran-mum? Slide 76 PMI model legislation a We are not seeking a mirror of FDA's MRTP statute, but we want rigorous standards that allow for commercialization and protect our assets. Fundamentals: - Ensure product safety and quality for market entry (?noti?cation plus") Authorization for claims Consumers should be informed about bene?ts Marketing notch less restrictive than tobacco?) - Public smoking restrictions (not smoke but determined by regulators) Above fundamentals to apply equally to reduced risk tobacco products and e-cigarettes Slide 77 PMI model legislation RRP: De?ned by product presentation (label. marketing) lmplicilclaimsincluded - Exclusion for certain conventional products Novel technology Should not present safety and quality issues Claim application ?estab lsh outline for evidence packages - Chemistry. manufacturing controls - Non-clinicals and clinicals - Consumer perception and behavior Studies Authorization standards burden of proof similar to 91 and (2) with exception oi "benefit the health of the population". Drafting an option for markets to use which would focus on post-market evidence of population harm. Slide 78 model legislation . Post-market surveillance mandatory report every 2 years Substantial equivalence: a manufacturers products 'substantially equivalent" to previously authorized product can be authorized pursuant to simpler process - Timing of ruling: time limitfor regulator to issue decision is 6 months (FDA has 1 year) Implementing regulations: regulations must be issued on scienti?c evidence, process, etc. Judicial Review: permit judicial review for any ?nal decision in the statute Slide 79 PMI model legislation Marketing Regulations for RRPs - At a minimum. manufacturers should be able to communicate functional bene?ts and how product works. - 1'2-1 communication. including age-veri?ed Internet activity - If there is a display baan?OSM ban. plain packaging, RRPs should be exempted Conversely. If media usage is generally permitted for cigarettes, we can likely work within the current framework - Legislation should allow regulators to monitor consumer understanding and approve speci?c marketing channels and permissions for the products Health Warnings Authorized products should have product-speci?c warning based on evidence Product subject only to noti?cation should have category-speci?c warnings Size should be EU Art 19 size for smokeless (some text) Slide 80 Transposition Objectives: Art 19 Novel Tobacco- - ?Noti?cation plus? Manufacturers must submit data listed in Art 19 Member States must review data and prevent non-compliant products from entering the market - Authorization system option implemented in key markets Frameworks based on risk reduction and possibility of claims - Avoid authorization in markets that do not support risk reduction option - Strive for P1 classified as smokeless novel tobacco product (link with ?scal strategy) Slide 81 Transposition Objectives: Art 20 E-cigarettes - TPD transposition - Transpose directive most provisions ?as is" - ?Notification plus" Manufacturers must submit data listed in Art 19 Member States must review data and prevent non?compliant products from entering the market - Claims prohibited unless authorized (ability to authorize claims as with Art 19) - Until TPD transposition prevent excessive regulation - Reasonable public smoking restrictions bans where use is Inappropriate. e.g. schools) Reasonable advertising a communication restrictions (allow certain communication freedoms not directed to minors and non-smokers. e.g. 1-2-1. POS) Prevent attempts to regulate e?cig category as medicines Slide 82 Ideal scenario - Notification under both Articles 19 and 20 would - require manufacturers to conduct meaningful analyses of their products. - submit the data to a Wregulatory authority for review. and require the regulator to prohibit the commercialization of the product if - not compliant with requirements of notification or - the data shows that the product is not safe or is inconsistent with its labelling (based on noti?cation requirements of 19 and 20) - Authorization based on manufacturer?s application to market product with a claim other than on pack De?nition of Evidence requiremerds for application [should mirror our evidence package) Standard for risk and exposure claim Ability Io communicate bene?ts {oil-pack) and. where appropriale. marketing freedoms Post market studies and surveillance Slide 33 FOCUS areas - - ldentify and engage competent authoritiesir expert bodies - Identify competent authorities - Map and assess expert bodies with the right expertise - Engage on PMI products and science - Buildnup network of scienti?c opinion leaders to provide ?expert? voice in discussions - identify! engage 3'?1 party groups that can be helpful in discussions - Monitor TCA activity develop strategy to counter attacks Slide 84 Regulatory Objectives: E-cigarettes Flexible regulation to ensure smokers' awareness of and access to less risky alternatives - Safety and quality standards and review - Product standards to ensure consistent and safe levels of pharmaceutical grade nicotine Rigorous scienti?c substantiation to support reduced risk claims Health warnings appropriate to the risks - Marketing permitted to allow smokers to be informed but limits such as bans on television - Reasonable public use restrictions Ban on sales to minors Reasonable taxation to allow the category to grow and to encourage switching from cigarettes i E-cigarettes not presented as treatment for tobacco dependence, including smoking cessation, should not be regulated as medicines All nicotine delivery products, including tobacco products, not presented with therapeutic claims should be regulated under one statute Under such statute, e-cigarettes should be regulated differently from combustible tobacco products Reduced risk or exposure claims for all products, including e-cigarettes, should be permitted only if supported by sound scientific evidence reviewed by competent regulatory authority Basic safety, quality and product performance standards need to be put in place for e-cigarettes to ensure that the products on the market meet consumer expectations (de facto reduced risk) Regulators need to be able to review the data provided by the manufacturers and deny access of non? compliant products to the market (notification process) Manufacturers should be required to disclose information about the product to the regulators before placing the product on the market. This information should include: Description of the product?s components, design features and operation The manufacturing process of the product and associated controls demonstrating conformity with safety and quality requirements - The formulation of the product, including details on the product composition and emissions - Toxicological data regarding ingredients used in the e-quuid and product emissions; information on nicotine dosing and uptake A plan for post-marketing studies to monitor adverse effects on human health and the impact of the product on tobacco consumption and on initiation of tobacco consumption among current users of tobacco products and non-users of tobacco products E-cigarettes should be required to comply with the following safety and quality standards: 30 mg/ml nicotine concentration ceiling (EU TPD: 20 mg/ml) Consistent nicotine delivery Use only pharmaceutical-grade nicotine Nicotine cartridge/container size should be restricted based on lethal dose of nicotine (EU TPD: 2 ml for cartridge. 10 ml for container) Flavorings and other ingredients should be prohibited only if they increase toxicity Safety concerns about consumerurefillable (SI?cigarettes should be addressed (eg. through ban of products altowiog maniputatioo of contents by consumers or at a minimum by requiring chiid~ and tamper~proot packaging) Health warnings should be based or; risk of e~ctgarettes (EU TPD: 3080 HW that is different from cigarettes) E-ctgarettes are a promising harm reduction product and should be subject to less restrictive advertising and marketing limitations than combustible tobacco products fig. at a minizttum manufacturers should be abte to communicate functionai and how product works; l~2~t communication thcluding agaverifieo totaruet activity; communication at - tf there is a display bantplaio packaging e~cigarettes and reduced risk products should be exempted; - Conversely. if media usage is generalty permitted for combustibte tobacco products, it should be permitted for e?cigarettes as well) Use of tobacco trademarks Should be permitted Only adults shoutd be allowed to buy e~cigarettes (minimum age of 18 or legat age for tobacco products it higher) E~cigarettes should be sold where tobacco products are sotd Pubiic ptace use Should be prohibited to places where inappropriate (eg. schools, heapitate) Manufacturers should be required to conduct postwmarket monitoring of use pattems and adverse events and report to the regulatora every two years E~ctgarettes should be subject to reasonable excise taxes? but treated in a separate product category The excise tax structure and level shoutd maintain the affordability of this product category relative to conventiohat tobacco products Slide 85 Focus - Understand the current environment PMl's ability to commercialize heated tobacco products and e- cigarettes under existing regulatory framework - What are current views on tobacco harm reduction? - Identify key stakeholders What would be the ideal legislative I regulatory framework? - Who would be the ideal regulator? - Which strategies oculd achieve the objective? - Whatis the timing. and prospects of success? Monitor threats opportunities Be ready to prepare and execute a plan Plan to support a launch, plan to change a law Slide 86 Tools Scientific engagement RRP Media Traditional tools - Policy papers Global plan - Direct advocacy - Leveragan science Monitoring and mapping - Tailored advocacy - Publications and posters Resources materials - Research institutions KW . Em? studies - Scienti?c media am I Opinion research Specialized government I - Badgmundem - Consumer! staireholder media stakeholders Wham] mobmzamn . Photos and tact cheats. etc Strategic plans Consultants wl specialized expertise Wand main! stamina-n: In mm phe- Slide 87 Agenda Competitive landscape PMl?s plans - Assessing reduced risk products Regulatory framework - Taxation of reduced risk products Slide 88 Status - Heated tobacco products HeatbarlOasis - CH. DE. AU. taxed as cigarettes Ploorn - AT, IT. taxed as other smoking tobacco (pipe) - KO, DE: pipe tobacco taxation refused P1 (test product) - CH. UK. DE, PL. JP. taxed as cigarettes - E-oigarettes Korea (Dec 201 1) - speci?c excise. equivalent to cigarettes on puff basis Minnesota (Jul 2013) - DTP excise. 95% ad valorem on wholesale price Italy (Jan 2014) - 58.5% ad valorem on RSP. including device Taxation of e-oigaretles under consideration in several other countries Slide 89 PMI ?scal objective for P1 Support the commercial viability of RRPs. by creating the right fiscal framework 1. Avoid a competitive disadvantage Ploom vs P1) Aim to get competing and comparable products in the same tax category 2. Ensure long term profitability 9 Preference for speci?c structure. to support good pricing productivity 3. Ensure consumer affordability Favorable tax level to reflect higher production costs and cost of device 9 Taxation other than cigarettes is a must Slide 90 Obtaining P1 taxation other than cigarettes 1. Convincing evidence that P1 is not a cigarette - Evidence that P1 is ?not smoked' is the most critical elemenl - PMI Council of Fellow Report (Nov 2012) Document used for Italian BTI filing Good base, but not independent Independent analysis (Prof Cozzani, University Of Bologna) Opinion expected early April Replicate independent analysis with scientists in other wave 1 markets Germany Slide 91 Obtaining P1 taxation other than cigarettes 2. Obtain customs rulings that set stage for excise classification EU company product speci?c -?Harmonized System? covers a_ll goods in a globally consistent way Possibility to obtain a BTI (customs ruling) - 6 yrs, legal entity specific -Objective: classify P1 under 2403.99 (other tobacco, not for smoking) Slide 92 Customs classi?cation of P1 HS Chapter 24 24 Tobacco and manufactured tobacco substitutes 2401 Unmanufactured tobacco: tobacco refuse 2402 Cigars, cheroots. cigarillos and cigarettes. of tobacco or of tobacco substitutes 2403 Other manufactured tobacco and manufactured tobacco substitutes; ?homogenized? or "reconstituted" tobacco; tobacco extracts and essences Smoking tobacco. whether or not containing tobacco substitutes in any proportion 2403.1 1 Water pipe tobacco 240319 Other. Other 2403.91 ?Homogenized? or ITeconstituted' tobacco 2403.99 Other Slide 93 Obtaining P1 taxation other than cigarettes 2. Obtain customs rulings that set stage for excise classification Dec 2013 I Apr 2014 - Oblained requested rulings in Italy - Apr 2014 - Expect ruling in Japan May-June - Request rulings in otherjurisdictions - Multiple rulings lo cover various PMI legal entities: (2) get broad backing that P1 is not a cigarette Slide 94 Obtaining P1 taxation other than cigarettes 3. Seek favorable excise classification 9 Excise product definitions differ per country Country speci?c de?nitions do not necessarin cover all tobacco products Existing definitions did not foresee P1 Three (short term) possibilities at market level 1. Acceptable excise category exists (eg. smokeless. pipe) 2 No category applies. thus no basis for taxation - Pay no tax or consider voluntary payment 3. Cigarette category applies (worst case) In parallel: seek new tailored category for heated tobacco products .9 Slide 95 Excise tax P1 in RSP parity with Marlboro Category Tax base Japan? ltaty Germany Greece Cigarettes 120 19? 212 165 Pipe Product weight 129 190 66 166 Pipe Tobacco mixture 71 190 56 65 Snuff Product weight 53 Snuff Tobacco mixture 24 - Achieving tobacco mixture as weight base is critical - Pipe tobacco is not always a convenient option ?Japnn ?gures inotude customs duties In Slide 96 Heated tobacco products - weight Weight I pod. stick Ploom P1 P2 Tobacco mixture weight (mg) 250 314 217 Total product weight (mg) 46? 798 1379 Tobacco ?Ia of weight 53% 39% 16% - Existing weight based taxes do not explicitly de?ne "weight base" - Substantial risk that total product weight is used as tax base - Taxation based on tobacco mixture weight is essential to avoid competitive disadvantage for P1 and P2 vs Pioom Slide 97 Timing - big picture 2018+ time I'P?hasejo Reduced Current Amended Harm Reduced Regulatory Harm Tax Tax Framework Tax Regime Regime in Piace Regime Applied indication 2014-2015 2014-2017 Slide 98 RRP excise taxation - Phase 0 ?ituation Cigarette definition applies to P1 - Example: Switzerland - Strategy: need to amend the law Situation 2 One of the other categories fits - Example: Japan - Short term: ?t Into best available category - term: create new category mm? None of the categories ?t - Example: Korea - Short term: do not pay excise tax - Mid term: create new category -.-.. v. w- 1. Excise Tax Categories Cigarettes Cigars cigarrllus Fine-cut Snuff HUI Slide 99 RRP excise taxation Phase 1 categories Use momenlum for o-cigarette laxalicn t0 advocate relevant new Excis Tax Categories Cigarettes I Cigars cigarilios i fin?EON Pipe tobacco Chewing tobacco Heated tobacco pro?uds Edgarc?es . mind lili 1 E-dgare?a - ?quid for re?ll Tax rates for different categories are driven by pplr?pai pressure and variety of criteria lag. - Production cost - Tax-bearing capacity - Sock-momma femurs Illicil lrade - Eulcmiai health bene?ls Slide 100 Taxation of heated tobacco products - Recommended excise definition heated tobacco product is de?ned as a manufactured tobacco product which delivers a vapor, without combustion of the tobacco mixture. - Recommended tax structure - Speci?c tax structure, based on weight of tobacco mixture - No tax on device - Recommended tax level Should not exceed excise tax on any conventional tobacco product - Should be taxed at a similar level as e-cigerettes - Should provide at least $20 {000 tax advantage compared to cigarettes, to account for difference in SVC. FME and device subsidy Slide 101 RRP excise taxation Phase 2 Excise Tax Categories Reduced Harm SKU's Cigarc?es Long Term Vision When the regulatory agency concludes that individual SKU's Cigars B. cigarilios Smoking tobacco are proven to reduce population Smokeless harm. they could obtain a ?scal advantage compared to the i MRTP - Scienti?c Substantiatim Heated tobacco products - EAcigarettes (sealed) -Y ion um base category, e.g. - X?iia reduction Standard Excise Rules 8. Rodueud Excuse Ram Ix a. la?on: 1 Slide 102 Taxation of e-cigarettes - guidelines - Tax the consumable. not the device - Avoid nicotine based taxation Keep it simple May notbe in our business interest - Start with low tax level - E-cigarette tax will be reference for heated tobacco products tax Test tax bearing capacity - tax level can be increased over time - Preference for specific system ldeally E-tiers to reflect cost differences between e-quuids and cartomizers Product Tax base Prevent loopholes ?Target price" Single use cartridges Speci?c per unit Container volume 2 ml Cheap cigarettes Re?ll containers Speci?c per ml Nicotine 20 OTP Slide 103 Tax equivalence ratios E-liquid Cigarettes Loglc Source 1 mi 20 Some e?cigarette manufacturers 1 ml 12.4 Puffcount Korean Government 1 ml 10-15 Puff counl. based on 15 German 1nstitutefor Risk concentration Assessment 1 ml 8-12 Consumer blogs 1 mi 10 PMI working standard - For heated tobacco products, we currentty use - 1 cigarettes :1 0.314 gram - is identifying a logicat. practical. defendabie conversion ratio between various products - Singie? evenasting scienti?c conversion not a realistic expectation Slide 104 Product definitions e-cigarettes (PMI draft) Electronic cigarette' means a product th at can be used for the consumption of nicotine-containing vapor. Electronic cigarettes can be disposable. refillable by means of a re?ll container or rechargeable with single use cartridges. - 'Re?h' containers' for electronic cigarettes are containers with nicotine- containing liquids which can be used by consumers to re?ll electronic cigarettes ?Single use cartridges? are pre-sealed reservoirs with nicotine- containing liquids, which can be used in electronic cigarettes - Disposable electronic cigare?es' are single use electronic cigarettes filled with nicotine-containing liquids Slide 105 Taxation of RRPs tobacco competitor views - CECCM - favors taxation on e-cigarettes - BAT - BAT Germany proposes wide de?nition for all novel products, Including e?cigarot?tes and heated tobacco, subject to full},r ad vaiorom excisu rate BAT Poland opposes tax on o-cigarattas - BAT ilaly appears to support modest tax on e-cigarette (EUR 0.2mm? - JTI - E?igsrettes are substitutes and should be subject to excise tax - No need to include in EU tobacco excise review discussion; right structure in few malkels ?rst priority FL IT) - Has sought pipe tobacco taxation for Flo-om - Agrees In principle to create new category [or heated tobacco products - Imperial - Proposes modest cxcisn tax on o-cigarettas Io legitimize category - Modest means 'approximatpty the some levei as cigars' - ?should be rree' Slide 106 Focus areas Timely engage on e-cigarette tax discussions at market level Propose moderate tax levels with speci?c structure If we don't propose solutions, we risk ad vatorem structure Create excise tax category for heated tobacco products Leverage ongoing discussions on e-cigarette taxation Monitor and leverage i? mitigate further launches of Ploom We have good process in the priority markets i.e. Italy, Japan and Germany. if authorities in these markets agree on that P1 is not smoked and it is not a cigarette which we learn in the coming few months -. this would be good reference points to other countries. The indicative tax levels are maximum tax levels we are considering at this stage. it does not mean that we are targeting these rates. Every market is separate and every market has its own reality, and different excise and custom duties. Overall, RRP taxation is a new concept. We are learning something new every day. Therefore we need to adopt a dynamic fiscal strategy approach based on new learnings and market developments. in this context, feedback of the markets and good information flow is crucial. All markets should not hesitate to contact us and share relevant information such as views of stakeholders on RRP taxation, tabled tax proposals for e-cigs etc. Slide 107 NI .mp- a to Excise and Customs To-Do List Before Importing RRPI (including any type a! Product Tnl} Check whether current licenses allow to import P1. P2 and P4 and release for consumption? Check the current excise categories and identify possible excise category Assess the possibility.r oi importation of P1 under 2403.99 from itaiy and P2 under 2403.99 from Switzerland Consider obtaining third party opinion regarding excise 8. customs classification Check tax stampislicker reQUIrements Assess the possibility of importation of P1 device under 9613 Agree on the initial approach based on likelihood of di?erenlscenarios for tax categories (Market. Fiscal. Indirect Taxalion and PMI RRP Team) 1. Would 2403.99 tarifi position and an avaiiable excise category that is consistent with this tan'? position apply to P1 and 2 Is there a risk of P1 andtor P2 taxed as cigarettes? Conduct exploratory:r meetings with Customs and Tax Authon'ties Agree on the iinal approach (Market MD, HuulJ Savelkouls. Serial Muderrisoglu) Prepare submissmn documents . Submit application tor the clari?cation on customs and receive official response . Submit application for the ciarllicetion on excise and receive of?cial response -- . Slide 109 Excise and Customs To-Do List Baton: importing RFIPI {trimming any type at Product Yul] Objectives Clarify the applicabte tax rates and custom duties - Avoid any misciassification that could set negative precedent for actual market launch Input Materials - Product description of P1 and P2 - Combustion and smoke information for P1 {Cozzeni report) KPMG opinion on customs tariff ciassi?cation of P1 and P2 KPMG opinion on excise ciassi?calion BTI torP1 for Italy Slide 110 Excise and Customs To-Do List Before Importing RRPs (including any type of Product Test) ruan uni-Ill m, am! l?4 Imr! cumnl cause autumn "In-In?- ruin.- llw. nl CA. und ulhicr :1in ?l?uxumm cm" a nulnml lax Imam-1,: n1 rm a ?n Ilhcluhml o! mikmm tux end-.mer maan wILh m: the [mall awmadu sub-multh mutual? and on cruise and rl?mnm Slide 111 Compensating the RRP tax advantage Total market size {mic Gigs} Government exciae revenues (USS hi0ul. ?eeaa?n Exclsa Lax level Addmoml excl? on cigarettes to U55]ij compensate RRP growth 50M 25 10060% Adjutanul 1? excasnon was 5 cigaranaa 20-35 150 - 0% e1? $3 ?55fa n59" we?? 49?? Slide 112 Creating a new category for Heated Tobacco Products PRO Enables reduced tax rate Ensures level playing ?eld between various heated tobacco products Facilitates speci?c tax structure Helps to have weight of tobacco mixture as tax base Combined tax category with existing other products 5m okeiess. pipe) may eventually cause problems Helps with excise classi?cation of P2 99E Doesn't guarantee reduced tax rate May lead to higher tax rate compared to some conventional categories leg. Dipel Will take time to introduce -) Even if we ?nd a satisfactory short term solution for the excise classification of P14 we should aim to create a HTP category over time in each market