Head of PM Equity Partner explains the dramatic side of corporate innovation
Corporate innovation has become a somewhat eye-roll-inducing term in the tech community, as it’s often labeled as overused and overly vague. While most corporates stick to widely adopted methodologies like establishing accelerators or incubators, dedicated innovation teams, and innovation hubs, others are transforming their businesses from the ground up. One such company is Philip Morris International (PMI), the tobacco giant that owns six of the world’s 15 best-selling cigarette brands including Marlboro, which is number one.
With smoking being the leading cause of preventable deaths globally (CDC), PMI has chosen to align with demand for less harmful alternatives and gradually move away from the business model that has defined the company since 1847. Much of their efforts to be at the forefront of realizing “a smoke-free future” are put into research and development (R&D), investing over US$6 billion over the past two decades.
The most notable example of such efforts is IQOS, a device that heats tobacco to a maximum of 350°C to produce vapor instead of smoke, as it’s below the 400°C burn threshold. The company points to 30 independent studies that find heat-not-burn devices to emit 90 to 95% fewer harmful or potentially harmful chemicals compared to traditional, combustible cigarettes. IQOS is used by 7.3 million consumers worldwide, and the company has several other alternative tobacco products in the pipeline, including their interpretation of the electronic cigarette.
In addition to internal innovation efforts, PMI is also tapping into the startup ecosystem through its investment arm, PM Equity Partner (PMEP), which focuses on environmental health, human health, and healthier fast-moving consumer goods (FMCGs). Founded in 2015, PMEP has nine diverse portfolio companies, including sustainable bio-chemicals and ingredients manufacturer Comet Biorefining, and Bow Group–an Internet of Things and wearables company.
Head of PMEP Jan Honoré has over 20 years of experience in the pharmaceutical, biotech and venture capital industries. He took on this role because PMI’s vision aligned with his view that companies, and not just regulators, should work to alleviate public health concerns. Jumpstart interviewed Honoré after he spoke on the “How Innovation and Technology Rejuvenate Corporates” panel at the 2019 Hong Kong International Entrepreneurs Festival (HKIEF), to better understand what the firm is doing to further PMI’s corporate innovation efforts.
What motivated PMI to pursue investment as a means of corporate innovation?
There are a lot of products that are being developed as part of our annual R&D budget, which is close to one billion [U.S.] dollars. But as we discussed in the panel here at the conference, it can be difficult to do real, groundbreaking innovation from within because you have certain paradigms and beliefs. If you don’t want to get crucified, you better stay within these limits.
That is one reason we founded PM Equity Partner, where we have a US$150 million fund to invest in outside innovation. We do not control these companies; we get, maybe, 20% ownership. They are, therefore, completely independent. That’s a very important way to get true innovation in a company like Phillip Morris.
What does disruption mean to PMEP?
It fundamentally means: can we help with this enormous task to convert all of the world’s smokers–there are more than 1 billion–to devices like this and others?
Today, we have 150 million smokers who smoke PMI products. Seven million of those have already converted to better alternatives to cigarettes, but there is a long way to go before we reach 150. Everything that can help with that–whether it is investing in new devices and technologies, digital health, or proteomics that can significantly improve clinical trials, so we can get more evidence to show regulators and consumers that we do reduce risk.
It is not only a question of reducing exposure, but its biological consequences.
What are the most important factors you consider when evaluating a potential portfolio company?
Number one is strategic fit. Can it make an impact on smoking in the world?
Number two you would assume is technology, but in reality, it’s the quality of the management and people. Very often, technology fails. You have certain visions and ideas, but it is risky to deal with new technology. So, having an experienced management team who can work well together and overcome obstacles is the most important.
There’s a long list of other factors. One of those is, of course, intellectual property.
What are some areas of development in biotech that excite you the most?
I am very interested in new technologies to improve the efficacy of clinical trials–continuous monitoring of physiology and vital signs combined with genomics and proteomics. AI provides amazing possibilities for breakthroughs in what we can monitor and show to regulators, so that we can get [alternative tobacco products] and pharmaceutical drugs approved in a much more effective way than before.
Of course, there’s the medical device space, which in many ways has been underinvested in the last several years. If you have a drug that is effective as a molecule, but you cannot get it into the body and administer it in the right way, it doesn’t help much. The respiratory route for delivery has been underestimated, and there are many things to research in this area.
Such as using vapor to deliver medication?
Absolutely. What that means is that you circumvent the liver in metabolizing the drug, so it doesn’t have the same toxicity requirements and has a faster onset. Through the lungs, it immediately gets delivered to the blood, and therefore, the brain.
What about innovations in cleantech?
As responsible citizens, and also a corporate with 80,000 employees and numerous factories around the world, we want to contribute to the circular economy. Helping to make the world more sustainable is an ethical requirement of our time.
We have invested in a solar-based company that brings energy to off-grid Africa, where 600 million people live without electricity today.
We are also investing in companies that can convert agricultural waste into green chemicals and attractive food ingredients, so instead of wasting resources, we can actively use them to make differentiated products.
How do you think manufacturers can be incentivized to develop FMCGs that are healthier?
This is quite interesting. We’re communicating everywhere that it is unhealthy and dangerous to smoke, and that has helped us to innovate and get to these new product categories. But if you think about it as just a normal consumer, there are so many products, unfortunately, in the FMCG category that are quite dangerous if you don’t control your consumption.
Let’s take alcohol, fast food, and soft drinks: these are all related to the epidemic growth of diseases like diabetes and obesity. Sooner or later, I think these industries will be confronted with the same requirements from regulators and society to disclose how the consumption of their products will influence health.
I believe that they will be inspired by what we have been doing and will be searching hard for ways to innovate. I’m sure that a lot of the companies in these industries are, as we speak, looking into reducing sugar and fat levels to make their (products) healthier. I think it’s good news for all of us.
Can you share a bit about PMEP’s most recent investment and why you were drawn to the company?
A company that I’m quite excited about is one from my home country of Denmark. We invested in an indoor cleantech company [Domisphere] that is using ultraviolet lights to produce free radicals that destroy pollution 100%. It has been used in outdoor cleaning systems, but now we are miniaturizing this technology, so it can be used for indoor air cleaning.
As you know, indoor pollution is a problem faced by countries all around the world. Many people use indoor air cleaners that are carbon-based; carbon is good, but it doesn’t destroy pollution fundamentally. It just absorbs the pollution, so it sits in the filters.
We can disrupt the industry by completely destroying the pollution, so there is nothing left in the filter, and you don’t need to change the filter over time. We see this as an extremely interesting investment to create a cleaner environment.
For young startups, where the founders are usually CEOs, you might come across the thought of hiring someone outside the company when your business and workload begins to grow.