Tobacco giant Philip Morris now generates around a quarter of its $28bn sales revenue from smoke-free products and aims to boost this share to more than half by 2025 under its Beyond Nicotine initiative. What may naively be viewed as an altruistic move is arguably more one of necessity, as changing public attitudes and increasingly tough government regulations have sent cigarette sales into decline.
In one of its most controversial moves to date, Philip Morris is now set to purchase the UK-based inhaler contract development and manufacturing company (CDMO) Vectura for £1.05bn, sparking criticism from healthcare campaigners and politicians alike.
Vectura has worked with global pharmaceutical giants including Bayer, GlaxoSmithKline and Novartis to develop treatments for a variety of lung diseases, which can be both exacerbated and caused by smoking.
UK Shadow Health Secretary Jonathan Ashworth and Shadow Business Secretary Ed Miliband condemned the bid, writing to Business Secretary Kwasi Kwarteng and Health Secretary Sajid Javid urging them to “work to ensure the future of this vital company is not in any way at risk”.
Ashworth and Miliband have directly called for the government to use the Enterprise Act 2002, which allows the government to intervene in M&As to curb the effects of a public health crisis.
Kwarteng is reportedly working with officials to get a better sense of Philip Morris’ plans for Vectura.
In accepting the deal, Vectura has turned down an offer from the Carlyle Group, having previously accepted its acquisition in May.
Capitalising on smoking-related illness
Health campaigners aren’t generally huge fans of Philip Morris’ smoke-free tobacco ambitions. It’s not just that there are still risks associated with non-combustible tobacco products; for many, the notion of a big tobacco company profiting from products to fix the problems it creates is distinctly distasteful.
But the Vectura acquisition is very different to developing another e-cigarette or nicotine chewing gum.
As Helen Thomas writes in the Financial Times, “It is like BP not only pursuing wind and solar power in the transition away from fossil fuels but getting into flood prevention and forest fire management in the meantime.”
American Lung Association president and CEO Harold Wimmer and American Thoracic Society president Lynn Schnapp described the acquisition as: “The latest reprehensible choice from a company that has profited from addicting users to its deadly products.”
They also expressed concern that Philip Morris would utilise technologies developed by Vectura to make its tobacco products more addictive.
Vectura currently makes most of its £200m in revenues from products for smoking-related diseases. Currently, the company has a portfolio of 13 inhaled and 11 non-inhaled products sold by its key partners in the pharmaceutical sector, as well as collaborations for drug products that are currently still in the clinical development stage.
The deal will give Philip Morris access to Vectura’s technologies and pharmaceutical development capabilities.
Philip Morris has said that Vectura will operate as an autonomous business unit, while forming the backbone of its inhaled therapeutics business.
Philip Morris International CEO Jacek Olczak said: “The market for inhaled therapeutics is large and growing rapidly, with significant opportunities to address unmet needs.
“By joining forces and investing our resources in the continued scientific excellence of our two companies we can secure critical capabilities to accelerate our long-term growth in beyond nicotine products, which is a core strategic focus for PMI.”
An inevitable step for the tobacco industry
The market for inhaled therapeutics is growing rapidly, with some analysts estimating that it could reach $41bn globally by 2026. Vectura generated approximately $245m in revenue last year.
Philip Morris says it expects to: “create a fully owned pipeline of products across a broad range of sectors in the prescription drug and over-the-counter categories that will complement Vectura’s CDMO business and service to its existing client base”.
Regardless of ethical criticisms around Philip Morris’ move, the tobacco industry has been living on borrowed time for a while. Despite a few pandemic-related peaks in sales, cigarette consumption is largely declining worldwide and particularly in countries like the US which have seen major public health efforts to combat smoking.
If companies like Philip Morris want to keep existing, then partnering with pharmaceutical organisations on tobacco-related harm reduction seems like one of the only pathways available.
Verdict deals analysis methodology
This analysis considers only announced and completed deals from the GlobalData financial deals database and excludes all terminated and rumoured deals. Country and industry are defined according to the headquarters and dominant industry of the target firm. The term ‘acquisition’ refers to both completed deals and those in the bidding stage.
GlobalData tracks real-time data concerning all merger and acquisition, private equity/venture capital and asset transaction activity around the world from thousands of company websites and other reliable sources.
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