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COMPETITIVE ANALYSIS Bac round - The Cigarette and the Smoking Exnerience Philip Morris USA is a producer of American blend cigarettes. The cigarettes are designed to provide a smoking experience for an adult. Made primarily from tobacco, flavorings and paper, the majority of the products have a cellulose acetate filter to adjust the delivery of the smoke that is emitted when the cigarette is lit. The consumer draws on the cigarette and inhales the smoke or gaseous, vaporous system into his or her lungs, then exhales the smoke into the air. The smoke delivers flavors, carbon monoxide, nicotine and tar to the smoker. Different people smoke cigarettes for different reasons. But, the primary reason is to deliver nicotine into their bodies. Nicotine is an alkaloid derived from the tobacco plant. It is a physiologically active nitrogen containing substance. Similar organic chemicals include nicotine, quinine, cocaine, atropine and morphine. While each of these substances can be used to affect human physiology, nicotine has a particularly broad range of influence. During the smoking act, nicotine is inhaled into the lungs in smoke, enters the bloodstream and travels to the brain in about eight to ten seconds. The nicotine alters the state of the smoker by becoming a neurotransmitter and a stimulant. Nicotine mimics the body's most important neurotransmitter, acetycholine (ACH), which controls heart rate and message sending within the brain. The nicotine is used to change psychological states leading to enhanced mental performance and relaxation. A little nicotine seems to stimulate, while a lot sedates a person. A smoker learns to control the delivery of nicotine through the smoking technique to create the desired mood state. In general, the smoker uses nicotine's control to moderate a mood, arousing attention in boring situations and calming anxiety in tense situations. Smoking enhances the smoker's mental performance and reduces anxiety in a sensorially pleasurable form. Other reasons for smoking, besides nicotine delivery, include habituation, attachment, personality, culture and genetics. Smoking is many different things to different people, including: • as an aid to vigilance, rapid information processing and memory • doing nothing while doing something • a communication tool • a sexually alluring act • a sign of rebelliousness • something to do with your hands • an oral gratification device • a taste experience and other sensory stimulation at back of throat, windpipe and lungs • a personal statement of image - based on the culture, it is positive or negative • a sign of a risk taker • predisposed in people by genetics In its broadest sense, the cigarette is a pleasure product. It alters mood states just like the caffeine, alcohol and sugar in other Philip Morris products that affect human physiology and psychology. As with nicotine, these substances become part of an individual's life style and are used as coping mechanisms to help adjust to the environment.

COMPETITIVE ANALYSIS ompetitive Products - Nicotine Delivery Nicotine delivery devices range from snuff, chewing tobacco, cigars, pipes and conventional cigarettes to unique smoking articles, chewing gum, patches, aerosol sprays and inhalers. The manufacturers of these products also vary considerably in type, size, areas of expertise and marketing approach. The chart below summarizes the major competitors, their area of focus and their-#arget market. Nicotine Delivery Device Ma or Producers Motivation Tar et Market . - - ' '- t3~'.i .. •--. - :• :....:...r. `'o ' `,-::'.; ;` ~!'-~'ZY .vv .. .,.. ^` ,` ~•ni- »b.o4>r• •~a , . •~ . Snuff; Mo1stand D ,u, : ......-. . .-v..-n t . . ..... Copenhagen; Skoal; U.S. Tobacco nicotine delivery, men Hawken; Kodiak Conwood oral gratification Heline Tobacco Pinkerton Chewin Tob8cco --•- --- Redman Pinkerton nicotine delivery, men Levi Garrett Conwood oral gratification National Heline :, - ,. . ar e c ars „'-~ . ._ __."-__ . _ . . . . n „ . r _ . . . . r.n. . . .., : . ... . . . Macanudo, Nat General Cigars nicotine and smoking men Sherman, Paratagas pleasure Don Diegos, H. Consolidated Cigars Upmann, Davidoff -r- - Pipes ~ .~ ~. r ,. .. .::a-:. ,,. :-:;:~= Champagne, Roma, Savanelli nicotine and smoking men Autographed pleasure Chestnut Briar, Alfred Dunhill Straight Grain Kildare, Emerald, Peterson Calabash Cf aretfes -tt- v: . ,.-- -"- ---- ---= ---- - -- ---- - - ---,. . : .. . r,. --- Montclair/Misty American Tobacco nicotine men Kool/Raleigh Brown & Williamson and and Mild Seven Japanese Tobacco Inc. smoking women Lark/Chesterfield Liggett pleasure Kent/Newport Lorillard Marlboro/B&H/Merit Philip Morris USA Winston/Camel R.J. Re nolds Un/ us Smokln Artfofes Premier R.J. Reynolds "better cigarette": men and women nicotine and smoking smokers; pleasure former smokers 2

COMPETiTIVE ANALYSIS Nicotine Delivery Device Ma or Producers Motivation Tar et Market Cheurin Gum or Polaar lex~ = Nicorette Marion Merrill Dow nicotine reduction men and women ' smoking cessation smokers; Ci Arrest (also tabiets Advanta e Ufe Products former smokers r Patches Habitrol Ciba-Geigy nicotine reduction, men and women, (Lohman) smoking cessation quitters and smokers Nicoderm Marion Merrell Dow (Aiza) Pro Step American Cyanamid (Lederle) Nicotrol/1 6 Wamer-Lambert (Cygnus, Kabi Pharmacia) Nicolan Lederle (Elan) N/A Lectec nicotine-free cessation men and women, device quitters & smokers Aerasols & l+lasat S r . _~ a . .. ... .... . . . . v. Rm n„~ +i4- it \+i i i' v=w x~~. .. , --; ~a ~~~ <~ ~« N/A Kabi-Pharmacia nicotine delivery or men and women, reduction quitters and smokers (/tl.7YiW .i+;ry'•,.h`{:•~~-`l •r .:.µrr, N/A Verband de Cigareten nicotine delivery or men and women, Industry reduction quitters and (Adelkopfer) smokers Minl u/+I v- A.._ .,.. K Y Y{ Y 4 h~Y SQYd{~r~t{~~~~'S r~Y N/A Aiza nicotine delivery or men and women, reduction quitters and smokers Tooth tck -- -r - - - - - . -- - ---- - ;:>:. N/A Swiss nicotine delivery or men and women, (DAttig) reduction quitters and smokers - -- ---r--- r r In ectable - ---- -~..~, ,v~_v, - - -__-- ---- • Nicerace Dyna Gen/Lectech smoking cessation men and women, quitters and smokers 3

COMPETITIVE ANALYSIS Competitive Products - Market Size Consumption Expenditures/Retail Purchases (in millions of dollars) - Change YAG ]01 1m 1s Amount Smoking Tobacco $252 N/A - - Chewing Tobacco 780 N/A - - Snuff A7.3 N/A - - Subtotal $1.905 $] .663 +14.6°l0 +242.0 Large Cigars $553 $552 FLAT FLAT Small Cigars __u 68 +21.3% +14.6 Subtotal SM $~Q +2.5% +16.0 Cigarettes $45.200 $41.536 +8.8% +3,664.0 Grand Total 47 741 19,819 +9.0% +3,922.0 Source: TMA Estimates (10/05/92) Estimated 1992 Nicotine Patch Prescription Sales (in millions of dollars) Nicotine Patch Coml2anv Blag Habitrol Ciba-Geigy $300 Nicoderm Marion Merrell Dow 275 Prostep American Cyanamid 75 Nicotrol Warner-Lambert 50 Total Estimated 1992 700 Source: Capital Institutional Services (8/19/92) Comi2etitive Products - Recent Trends In the last five years, the scientific community in both the United States and Europe has been pursuing innovative nicotine delivery systems to either replace or transform the worldwide cigarette business as we know it. The majority of the patent activity has been focused on transdermal and nasal delivery systems, although more recent work has moved into tablets and injectable nicotine. The primary motivation for the products is smoking cessation through a controlled, gradual reduction in nicotine delivery. The companies dominating the development and the marketing are primarily pharmaceutical firms, although Procter and Gamble, Seimens and JTI have also shown interest in the subject. The barriers to entry that have characterized the tobacco business do not constrain the broad field of potential competitors we now face. In addition, the nature of competitive product development relies on legal protections afforded to technological innovation - an area not historically of value to the oligopolistic tobacco industry. 4

COMPETITIVE ANALYSIS In fact, only one domestic tobacco company has attempted to commercialize a new type of nicotine delivery device. In September 1987, R.J. Reynolds publicly announced a new type of smoking article called Premier. The Premier article, which looked like a cigarette, consisted of a carbon heat source, a reservoir of nicotine and glycerol on aluminum oxide pellets and a weakly efficient filter system. It was offered in two test markets in Arizona and Missouri in 1988. The markets did not do well and were closed in early 1989. Premier was hard to light, did not bum down, smelled and tasted bad. But, it has a number of key attributes: zero biological activity, no ashes, minimal sidestream smoke and limited fire safety problems. In a sense, the use of a carbon heat source in an aluminum capsule filled with flavor pellets, surrounded by tobacco, paper and a filter revolutionized cigarette smoking. Perhaps if those who had tried it had taken the time to acquire a taste for it, the product would have established itself as a mainstream smoke. But, the sensory sacrifice was too great - and the product failed. Since 1988, R.J. Reynolds has continued to work on this device to improve its subjectives. This work, along with a large collection of patent activity, indicates that RJR maintains a strong commitment to new smoking devices. R.J. Reynolds is not alone in its pursuit of a better cigarette. Other tobacco industry patent activity by JTI, the Imperial Group, Procordia A.B. and Brown and Williamson illustrates extensive interest in the development of a superior nicotine delivery device, with or without a tobacco base. In addition, Austria Tabak is constructing a new research center with the stated ambition of developing "the world's lowest risk cigarette". The pharmaceutical companies, on the other hand, are pursuing substitute nicotine delivery devices in a range of formats - from patches to pills to inhalers. Their stated motivation is smoking cessation. The drug company devices generally lack the ritual of the smoking act and its sensual pleasures, but they do deliver nicotine in its most basic form. In addition, Siemens is working on battery powered devices and inhalers that could deliver nicotine. A summary of recent patent activity follows this analysis. Philip Morris has chosen to pursue a nicotine delivery device that, like RJR's Premier, continues the cigarette tradition of sucking on a cylindrical mouthpiece to inhale flavorings and nicotine from a tobacco based product. The approach of heating rather than burning the tobacco produces a cleaner, safer smoking experience. Known by the code name of Table, the product has the potential to replace the conventional cigarette = in much the same way that cigarettes replaced chewing tobacco over a hundred years ago - as a more socially acceptable form of tobacco use. As preparations are made to consider launching Table, two key challenges face Philip Morris: • Can Philip Morris build a world-class nicotine delivery device that can compete successfully with conventional cigarettes as well as pharmaceutical company cessation products? • Will the consumer find this revolutionary nicotine delivery device uniquely appealing? If you believe that both of these can be answered in the affirmative, it is imperative that Philip Morris move quickly to pre-empt the competition and deliver a superior cigarette to the American public. 5

PATENT SEARCH Assignee Abstract : ;--- ---- , - . ..... . • . , : ,,. Patches = = - - -------= ---- --- ------- - - =- - - - - - - - - . . . :...........•-;-..__~....... -- -- _ Aiza Corp. drug delivery at a controlled rate for prolonged period of time through polymeric material. Pharmetrix Corp. controlled release transdermal delivery system for nicotine. Schering Corp. nicotine release patch comprising a polymeric matrix containing nicotine or anicotine sale and an anti-pruritic compound. Aiza Corp. transdermal therapeutic system which utilizes electrical current to facilitate agent delivery. Pharmetrix Corp. transdermal nicotine patch which includes rate controlling membrane to keep the nicotine flux within useful and safe limits for period of 12-24 months. Elan Transdermal preparation for the transdermal delivery of nicotine for treating smoking withdrawal symptoms. Lion Corp. hydropholic polymer membrane for transdermal dry delivery patch to regulate rate of diffusion. Theratech Inc. transdermal drug delivery device comprising a drug formulation containing reservoir defined by a backing layer and a drug permeable membrane layer. Alza Corp. skin patch for delivering medicaments such as nicotine at a controlled rate. Alza Corp. describes the construction of a pouch for the stable containment of nicotine for extended periods. Pharmetrix Corp. method for smoking cessation therapy that utilizes transdermal nicotine delivery via a patch that can hold and deliver sufficient nicotine for a period of 12-24 hours. Lohmann describes a device for transdermal application of therapeutic agents. Pharmacia transdermal system with a reservoir layer comprising an active substance. Alza Corp. osmotic device for the controlled systemic delivery of nicotine through an oral mucosal membrane. Sano Corp. effective amount of the drug buspirone in a transdermal delivery device is used for treatment of tobacco cravin and addiction. 6-

PATENT SEARCH Assignee Abstract moke ess garettes & evi ces, a ers, er ces, tomizers - - -_ _,. ..-:-- - • - - - -- -- - --- ------- - Toa Nenryo Kogyo vibrating element for ultrasonic atomizer in inhaler for variety of uses. Kabushiki Kaisha - R. J. Reynolds smoking article with improved insulating material giving tobacco flavor from heated but not burnt tobacco for use as cigarette substitute. Perfetti Spa chewing gum substitute for tobacco smoking is described, based on three gram strips of chewing gum which include no more than 0.4mg of nicotine. Synectics substitute cigarette containing central tube of volatilizable formulation, surrounded but partitioned for coaxial tubes and/or layers of combustible material. Nomura Toys device which has the appearance of an ignited cigarette and which releases a fragrance impregnated in a core material when the mouthpiece is drawn on, as in smoking. Kowa Display tobacco raw material is impregnated with a nicotine containing tobacco extract flavor and used to fill a container having air permeability at both side faces. Japan Tobacco an article is described in the form of a cigarette which contains a plastic vessel. A tobacco perfume solution, obtained by dry distillation of tobacco is housed in the thin wall part of the vessel. Battelle portable nebulizer capable of producing a finely divided aerosol having uniformly sized droplets. The nebulizer includes a source of fluid such as a capillary tube coupled to a fluid reservoir to which a high voltage is applied in order to generate the aerosol by electrical atomization. R. J. Reynolds smokeless cigarette incorporating catalysts in the fuel element for selective removal of carbon monoxide. Francisco Ricart simulated cigarette or cigar having partitioned section within tube first packed with pumice stone impregnated with concentrated hydrochloric acid and held in place with a cotton or wax plug, then another with pumice treated with menthol, and a third with ammonia or ammonium carbonate. The ammonium chloride vapor produced is said to be inoffensive and smoke colored. The chemicals are mixed when air is inhaled. Falmouth cigarette holder designed to provide adjustable dilution and gradual Pharmaceuticals withdrawal. Consists of tapered mouthpiece, tubular sleeve having rotatable section incorporating a series of sockets corresponding with alignment or regis of partitions or discs with crescent shaped slots. A smoker begins with the first setting, or maximum alignment, and then rotates to decrease amount of smoke drawn through. Battelle aerosol device or smokeless cigarette comprising a central tub communicating with an aerosol nucleating chamber between the nicotine release material and the mouthpiece. Battelle aerosol device similar to GB1033674 with improvement. Resembles a simulated cigarette in that the central tub is segmented or made of frangible material to break off with the ash as the device is smoked. 7

PATENT SEARCH Assignee Abstract Smoke{ess Cigarettes & Devfce% inhalers, Aeroscl Cevl ----- ~tOmfzer3 -- - --- - - - - - -. _ __::- - - - - - -- v-- - - - --- - - --•.......-. . .:....~>x, ==- H-2-O Filter Corp. mouthpiece contains spiral wrapped sheet with micro encapsulated flavor and abrasive particles to open barrier and stops smoke from combustion. Imperial Group simulated cigarette with central core through the rod. Mouth-end chamber containing a thermal flavor release agent to form aerosol. Fuel element is compacted or extruded tobacco or NACMC and carbon mixtures. Eastman Kodak using a device similar to a smoking machine, a controlled amount of heated water vapor is measured drawn through cellulose acetate filter for a controlled period of time. The percentage of collapse of the wetted and heated filler is then determined. R.J. Reynolds simulated cigarette consists of a tube containing a particulate or powdered substance loaded with a flavoring agent. Spaced or staggered baffles located in the air intake or central tube provide a turbulent air flow passing through the chamber holding the particulate substance. R.J. Reynolds reusable aerosol smoking device contains a disposable, replaceable cartridge with a carbonized fuel element. Less than about 30mm long, a separate aerosol generating chamber with flavorants and means to hold the cartridge insert down within the pipe bowl. R.J. Reynolds smoking device that produces aerosol resembling tobacco smoke but with mini TPM or pyrolysis products. Comprises a short combustible carbon fuel element having longitudinal air channels, aluminum disc, a flavor chamber, a heat conducting tube which contacts and conveys part of the fuel element and the flavor chamber, and an insulating jacket surrounding at least part of the fuel element. The smoke or aerosol consists of mainly warmed air, carbon dioxide, carbon monoxide, water and flavorants. University of method and apparatus described for application to the oral cavity and California respiratory tract of a smoker. The liquid aerosol contains particles of a food acid such as citrus acid present in non-toxic amounts and capable of being inhaled. The acid stimulates the sensations of the respiratory tract normally caused by smoking, simulating the smoking effect. R.J. Reynolds smokeless cigarette with a preferably carbonaceous fuel element and a separate aerosol generating means contained within a unitary heat conductive container, maintained in a conductive heat exchange relationship. Proctor & Gamble air swept inhaler device to deliver aerosol at a constant concentration. Shown as a simulated or substitute cigarette to dispense nicotine. Includes a battery power resistance heater and a manual switch, activated by puffing. R.J. Reynolds smokeless cigarette disclosed as having rapid heat transfer and improved aerosol delivery, preferably 1.5 or more in first three puffs. One segment comprises a very short (7-10mm) carbon fuel element which has multiple passages. R.J. Reynolds ' non-combusting simulated cigarette comprising an outer tube and an inner container holding a liquid such as an alcohol-water flavorant mixture. 8

PATENT SEARCH Assignee Abstract moke/ess garettes & f3ovjceq~ fnhaters, Aero$vJCes, A#omizer~ - - -- -------,-_--__ Brown & Williamson inhaler device comprising a hollow paper or plastic tube containing a recessed section of two semicylindrical halves of absorbent material, such as cellulose acetate charcoal, cotton or particulate polytetrafluoroethylene. The two halves are sealed off by an impermeable membrane. R.J. Reynolds variation of the RJR smokeless device having a fast burning annular fuel layer to ease lighting and provide rapid heat transfer to the thin metallic central tube aerosol generator. AB Leo substitute smoking device contains tobacco composition that releases pure nicotine at elevated temperature but below the combustion temperature of the filler. Kimberly-Clark smoking article wrapper construction particularly useful for smokeless cigarette. The wrapper is a duel sheet with an inner cellulosic layer enclosing the fuel element and having controlled permeability and biased burn properties. R.J. Reynolds smokeless cigarette comprising a short combusting carbon fuel element; a short, heat-stable preferably carbonace aerosol carrier and a relatively long mouthpiece with filter. R.J. Reynolds frustoconical apparatus for pleating and forming a fibrous web into a filter rod or mouthpiece, particularly for use with premier type smokeless cigarettes. Advanced Tobacco non-combusting aerosol device to be used as a cigarette substitute which Products contains fibrous material impregnated with a nicotine release mixture. University of simulated cigarette device for regenerating smoke from collected condensate California which has been freed of undesirable vapor phase components and dispensing a lower delivery smoke aerosol. Imperial Tobacco provides a cylindrical smoking device for releasing an aerosol in which loss of nicotine by pyrolysis or in sidestream smoke is substantially avoided. AB Leo a nicotine release composition and an inhaler device. Tobacco composition comprises a mixture of tobacco, a hydrated salt, encapsulated water, oil, detergents and/or flavor agents. The composition is heated in the device which is in the form of a holder, to below the combustible temperature of the tobacco but high enough to liberate nicotine when heated air is drawn through the composition. R.J. Reynolds smoking article having a carbonaceous element, a physically separate aerosol generate situated behind the fueled element and including an aerosol forming material. R.J. Reynolds a porous carrier material, preferably particulate activated carbon or sintered alumina, having a tobacco flavor material and an absorbed non-tobacco aerosol forming material. R.J. Reynolds comprises means to form an axial passage through a jacketed rod and to insert an aerosol generating cartridge into the passage. The fuel element is inserted inside an insulating sleeve. 9-