Last week Philip Morris International announced it has agreed to buy Fertin Pharma from current owners EQT (70%) and the Bagger-Sørensen family (30%). The transaction value is roughly $820 million, for a price/sales multiple of somewhat over 5x, and an EV/EBITDA valuation of approximately 15x (using fy2020 financial data). Fertin Pharma started as a candy business in Denmark in the early 20th century, and subsequently expanded its operations into chewing gum and nicotine gum (1996). Its regular chewing gum brands, including Stimorol and V6, were sold to Cadbury Schweppes in 2001 and are nowadays part of Mondelez International. Since the branded candy exit, the company has focused its operations on developing products for oral delivery of nicotine, most prominently with nicotine gum, but has also developed know-how for delivering nicotine through lozenges, liquefiable tablets and pouches. Additionally, these delivery systems can also be deployed to deliver other active ingredients to the human body, such as vitamins, cannabinoids and caffeine.
Given the attractive market developments in recent years in such product categories as energy drinks, alternative nicotine products and cannibanoids, Fertin’s product portfolio fits well with PM’s stated goals of growing smokefree sales to 50% of total revenues and non-nicotine sales to at least $1 billion by 2025. Currently, Fertin operates primarily as a contract manufacturer for third parties, and not as a an important owner of branded products. Philip Morris is therefore buying the company for its technological and manufacturing capabilities, in my opinion primarily with regards to nicotine pouches. Nicotine pouches are the largest category in the modern oral nicotine (or MON) space and have shown very significant growth in recent years, particularly in North America and the Nordic and German-speaking regions of Europe. The outlook for these types of products is generally regarded as excellent due to their affordable nature, availability of flavors, ease of use and the dramatically lower health risk associated with their usage (when compared to cigarettes).
Even though PM is a clear frontrunner in smokefree nicotine products, which comprises heated tobacco, vapor and modern oral, the company is trailing its competitors in the latter category. Swedish Match and British American Tobacco have taken a clear lead in modern oral, while Altria has acquired Burger Sohne from Switzerland for its on! brand of nicotine pouches. Imperial Brands and Japan Tobacco are small players in this category, and are mostly competing with products launched by their existing Swedish snus subsidiaries (Skruf and Nordic Snus). PM’s acquisition of Fertin is meant to close the gap with its competitors in modern oral products, with Fertin adding the expertise and manufacturing capabilities to develop oral nicotine products while PM will likely assume responsibility for branding and marketing strategy. I believe the development and market introduction of a branded nicotine pouch product will likely be PM’s first priority after the acquisition closes. Longer term, Philip Morris may also explore possibilities for developing products with other active ingredients, as well as nicotine products with other delivery mechanisms. The deal makes a lot of sense from a strategic standpoint, at an acceptable price point, and since it is still early days in the modern oral category, PM is now in a better position to become a serious contender in this field.
(Disclosure: the author owns shares of British American Tobacco)
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Update to this story: Today Philip Morris announced another acquisition that builds on its commitment to grow its smokefree sales and establish a substantial revenue base from non-nicotine products. The offer of $1.2bn made for Vectura Group from the UK resembles the offer for Fertin Pharma in that will add product know-how and manufacturing capabilities in a field where PM sees opportunities for growth, namely inhaled and oral therapeutic products. As with Fertin, Vectura operates as a contract manufacturer for third parties, many of them global pharmaceutical companies, that wish to develop inhalation or oral delivery products for their therapeutics.
Whereas I believe the Fertin acquisition primarily fits with PM’s 50% smokefree revenues ambition, Vectura fits PM’s ‘Beyond Nicotine’ strategy announced earlier this year. The ‘Beyond Nicotine’ strategy is a logical step that follows from PM’s journey to develop and grow its smokefree sales. Part of that journey has been the development of expertise and know-how to effectively deliver active ingredients to the human body. Of course this started as a question of how to effectively deliver nicotine to the human brain without the use of a combustion process. One of the lessons drawn from that journey is that the science and technology behind both inhaled and oral delivery of active ingredients is highly complicated, but also potentially more effective than delivery mechanisms that use the body’s digestive tract (more rapid, and with a higher and more targeted delivery rate). Given that much of the therapeutical drug market still depends on oral solid dosages, the continued development of more efficient oral delivery and inhalation mechanisms potentially offers a very significant market opportunity outside of PM’s legacy business. Of course, the know-how to deliver active ingredients via these pathways may also be of use to PM’s nicotine business.
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