Philip Morris/Vectura: inhale seizer seeks future beyond smoke

There is a paradox in a tobacco giant moving into healthcare. Pharmaceuticals keep people alive. Cigarettes kill them.

Philip Morris’s agreement to buy Vectura’s outstanding shares at an enterprise value of £824m involves another apparent contradiction. The UK-based company’s products include inhalers that deliver pulmonary treatments. Smokers clog their lungs with carcinogens through the same process.

The big US tobacco group is not preparing to reprise old ad campaigns in which doctors extolled the health benefits of smoking. Instead, like all its peers, it seeks an exit route from a dying industry. The company is investing some $8bn in new technology, including making better e-cigarettes.

Philip Morris therefore sees overlap between its own inhalation research and that of Vectura. Savvy analysts suggest the UK group’s expertise in delivering measured doses of inhalants will help new e-cigarettes from Philip Morris to pass the scrutiny of America’s Food and Drug Administration.

By 2025 Philip Morris hopes non-nicotine products will produce $1bn of revenues, Stifel notes. That compares with a total expected to top $38bn, according to S&P Global. More than 50 per cent of sales should come from smoke-free products such as the IQOS e-cigarette.

The danger is that Philip Morris expands wholesale into industries where similarities with its core business are only superficial. Hard-pressed mature companies have a weakness for this. Examples include engineer Marconi, which overpaid disastrously for digital start-ups and energy retailer Centrica which stumbled upstream.

The deal value for Vectura is small enough to represent an option purchase, one Philip Morris need not haggle over. The tobacco group, with a market value of $153bn, has agreed a premium of 55 per cent over the undisturbed price. The offer represents a 16 times multiple of enterprise value to forward ebitda.

Carlyle made a lower offer in May. On Friday, Vectura shares were trading 4p above Philip Morris’s fresh bid of 150p per share, reflecting hopes of a counterbid. The private equity group will be more price sensitive than Philip Morris. But stranger things have happened, as illustrated by the advent of the healthcare-curious cigarette maker.

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