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Philip Morris International’s £1.1 bn Acquisition of Vectura

By Sonia Andrzejuk, Edoardo Borsoi, Luca Introna and Andrea Zenoniani (Bocconi University)

Photo: Sincerely Media (Unsplash)


Overview of the deal

Acquirer: Philip Morris International Inc. (PM)

Target: Vectura Group PLC (VEC.L)

Total Transaction Size: $1.5 bn (£1.1 bn)

Bid premium: 35.25%

Rumour date: 26/05/2021

Announced date: 09/08/2021

Expected completion date: 31/12/2021

Target advisors: JP Morgan, Rothschild & Co.

Acquirer advisor: Bank of America Corporation

Cigarette maker Philip Morris (PM.N) clinched its £1.1 bn takeover of asthma inhaler maker Vectura (VEC.L). On 16/09/21 it was announced that the acceptance condition has now been met, in respect of 448,246,977 shares (74.77 percent). The offer has become unconditional in all aspects.

Buying the London-listed inhaler maker is part of Philip Morris' long-term plan to develop "smoke-free" products and switch to being a "broader healthcare and wellness" company.

However, the deal has faced backlash since more than 20 UK, US, and European organizations have written to Vectura's management, urging it to reconsider the takeover on ethical and practical grounds.

In particular, it has angered health groups such as Asthma UK and the British Lung Foundation that have questioned whether a tobacco group should own a company that cures the very respiratory illnesses cigarettes cause. Indeed, it creates perverse incentives for PMI to sell more of its harmful products so they might then profit again through treating smoking-related diseases.

Going beyond these critics, PMI affirmed its commitment to using its resources and expertise to help Vectura grow its business and help PMI achieve its Beyond Nicotine ambitions.

“While PMI and Vectura come from different places, when it comes to the future, we are united by a common commitment: employing science and technology to develop innovations that aim to improve people’s lives, transform public health, and help society to progress. ” - Jacek Olczak, CEO of PMI

Company Details: (Acquirer - Philip Morris International Inc.)

Philip Morris International Inc. (PMI) is a Swiss-American multinational cigarette and tobacco manufacturing company, with products sold in over 180 countries. The most recognized and best-selling product of the company is Marlboro.

While it is the leading international tobacco company today, in 2016 PMI radically changed its business strategy; The firm announced its vision to deliver a smoke-free future and started shifting its resources toward the development and responsible marketing of scientifically substantiated smoke-free products. By 2025, PMI aims to become a majority smoke-free business, with its smoke-free products accounting for more than 50 percent of its total net revenues.

Founded in 1847, headquartered in New York City, New York, USA

CEO: Jacek Olczak

Number of employees: 71,000

Market Cap: $158.47 B (as of 24 September 2021)

EV: $184.27 B

LTM Revenue: $30.07 B

LTM EBITDA: $13.72 B

LTM EV/Revenue: 6.13 x

LTM EV/EBITDA: 13.43 x

Company Details (Target - Vectura Group PLC)

Vectura is a leading specialist inhalation contract development and manufacturing organization that provides innovative inhaled drug delivery solutions that enable customers to bring their medicines to patients.

With differentiated proprietary technology and pharmaceutical development expertise, Vectura is one of the few companies globally with the device, formulation, and development capabilities to deliver a broad range of complex inhaled therapies.

Vectura has thirteen key inhaled and eleven non-inhaled products marketed by partners with global royalty streams, and a diverse partnered portfolio of drugs in clinical development.

Founded in 1997, headquartered in Chippenham, England, UK

CEO: William Downie

Number of employees: 502

Market Cap: $1.38 B (as of 24/09/2021)

EV: $1.234 B

LTM Revenue: $260.55 M

LTM EBITDA: $75.60 M

LTM EV/Revenue: 4.74 x

LTM EV/EBITDA: 16.32 x

Projections and Assumptions

Short-term consequences

As a result of this acquisition, PMI will get access to differentiated proprietary technology and create a unit with expertise in the production of asthma inhalers and the development of groundbreaking Covid-19 inhaler treatments. Because the firm has targeted respiratory drugs as a key driver, this agreement will aid in the company's goal of generating more than $1 billion in revenue from "beyond nicotine" products by 2025 as part of its effort to transform into a broader healthcare and wellness company.

As a result of this deal, PMI intends to let Vectura operate as an autonomous business unit, which will act as the backbone of its inhaled therapeutic operations and has also pledged to increase its investment in Vectura's R&D to accelerate the development and delivery of novel therapeutics that will address many unmet medical needs.

Despite PMI's assurance, the deal's announcement also unleashed a flood of alarm from health charities and public health experts, who are concerned about the company's true intentions and a potential conflict of interest, as well as the ethical concerns the deal may raise.

The deal, which is worth roughly £1.1 billion in total and includes an all-cash offer of 165 pence per share, is intended to be immaterial on PMI’s full-year 2021 adjusted diluted EPS. Vectura's shares gained 14 percent on the day of the announcement (July 9) and as of September 24 have continued to rise to 165 pence. PMI's stock rose 1% on the day of the news and as of September 24, have since risen to $101.82 per share.

Long-term Upsides

As more and more people shift to healthier lifestyles, one of PMI’s greatest long-term challenges is adapting its core business to the new market reality, consumer trends and expectations, and preventing obsolescence. More than one million people have given up smoking since the COVID-19 pandemic hit as the survey for charity Action on Smoking and Health suggests. On the other hand, research conducted by University College London suggests that more people have quit smoking in 2020 than in any year since 2007. PMI is in the process of sourcing opportunities and the market for inhaled therapeutics is large and growing rapidly with significant opportunities to address unmet needs.

Acquisition of Vectura is PMI’s long-term plan of diversifying its business away from harmful tobacco products and moving into a broader healthcare and wellness company. Vectura will give credibility to PMI’s transformation and will long-term increase confidence in the company’s transformation both to the public as well as the scientific community. On the other hand, Vectura will utilize PMI’s means to undertake end-to-end development of inhalable drug-device combinations and will provide access to PMI’s capabilities in areas such as preclinical safety, clinical development, regulatory affairs, drug safety, market access, and global reach, that will in the long-term steadily position the company to address the market growth.

PMI also believes that this investment will strengthen the United Kingdom’s position as a major scientific innovator and benefit the scientific ecosystem in the country for a longer-term.

Risks and Uncertainties

Buying the London-listed inhaler maker is part of Philipp Morris’ long-term plan to develop “smoke-free” products and switch to being a “broader healthcare and wellness” company. However, this deal has angered health groups such as Asthma UK and the British Lung Foundation, which have questioned whether a tobacco group should own a company that cures the very respiratory illnesses cigarettes cause. Asthma UK and the British Lung Foundation have sent a letter, co-signed by 35 charities and public health experts, urging the government to investigate any conflict of interest issues. Along with this, PMI will have to deal with the risk of Vectura being barred from participating in health and policy decisions, such as receiving government grants, publishing research in journals, or conducting clinical trials alongside universities, because many agencies, publishers, and universities have very strict policies against tobacco-related companies.

Moreover, in addition to the external challenges, PMI is also facing potential internal unrest: a former senior Vectura executive told The Times "employees are concerned" about the change in ownership.

To solve these issues, on the one hand, Philip Morris has acknowledged the mood, with CEO Jacek Olczak asking Vectura staff to "allow us to demonstrate to you who we are as a company" even if they have "concerns about our intent." On the other hand, PMI has received regulatory clearances for the deal and following the public tender process, its offer cannot now be withdrawn.

Despite the inconveniences, PMI has so far over 75% of Vectura’s shares, obtaining the possibility to delist the company, and has extended its offer until September 30th, giving Vectura shareholders time to accept its proposal.

“The Acquisition will provide our people with the opportunity to form the backbone of an autonomous inhaled therapeutic business unit of PMI, helping develop products to improve patients' lives and address unmet medical needs” - Bruno Angelici, chairman of Vectura



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