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)