Philip Morris: Beyond

Nicotine or Smoke &

Mirrors?
Ben Laxton‐Tilt & Jas Ahmad
© 2022

“It is unacceptable that companies that have profited from the devastation smoking causes could
then make even more money providing treatments for the illnesses they have caused,” said Sarah
Woolnough, the chief executive of the British Lung Foundation, when the Philip Morris bid for the
British pharmaceutical company Vectura was announced in July 2021.1 Philip Morris claimed that it
was pursuing its ‘Beyond Nicotine’ strategy and was committed to moving out of the cigarette
business. “We believe in, and we are going to contribute to, cigarettes being phased out,” its chief
financial officer (CFO) had declared at the time.2

PHILIP MORRIS INTERNATIONAL

Philip Morris International (PMI) is a manufacturer and distributor of tobacco and nicotine products,
predominantly cigarettes. It owns six of the top 15 international brands including the iconic
Marlboro brand. PMI products are sold in over 180 countries. In about 95% of those markets the
company has more than 15% market share, including in Japan, Germany, Italy, Spain, Poland,
Canada and Russia. Excluding the US and China, PMI has just under 28% market share worldwide.3
In the UK, PMI is the third largest tobacco company with only 1.5% market share in 2021, behind
British American Tobacco with 7.7% and Booker Group with 21.8%.4

PMI’s product portfolio can be divided into two categories: Combustible

Products and Reduced Risk Products. Combustible Products include
their cigarette brands, contributing approximately 76% of the firm’s
revenues; the Reduced Risk Products include e‐cigarettes and heated
tobacco products which contribute about 24% revenues.

In May 2021 PMI appointed Jacek Olczak as their new chief executive
officer (CEO). Olczak had started at PMI in 1993 and had served as the
firm’s CFO and chief operating officer (COO) before his promotion. As
COO, Olczak was instrumental in the growth of the Reduced Risk
products. By the end of his tenure as COO, net revenue from smoke‐
free products had increased to 28% and the number of markets in which
PMI sold smoke‐free products had increased from zero to 66.5
Jacek Olczak
Courtesy PMI press

THE INDUSTRY ENVIRONMENT IN 2021

Revenues from cigarettes and other tobacco products have been declining in the UK for the past
five years, in line with worldwide trends.6 Since 2016 PMI has seen significant decreases in the
volume of cigarette shipments across all of its major geographic markets (Table 1).

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In 2019, the Office for National Statistics (ONS) reported that 14.1% of adults in the UK identified as
smokers, the lowest percentage recorded since 2010, falling from 14.7% in 2018 and 20.2% in 2011.
In 1974, it was over 45%. The decrease was most significant in the 18 to 24 olds of whom 16%
identified as smokers in 2019 while in 2011 this figure stood at 25.7%.7 The fall in the number of
smokers may be attributed to two factors in particular: the increased regulation and restrictions
imposed on the industry by the government and a shift towards more health‐conscious lifestyles.

Table 1: PMI Cigarette Shipment Volume (million units)

2020 2019 2018 2017 2016
European Union 163,420 174,319 179,622 187,293 193,586
Eastern Europe 93,462 100,644 108,718 119,398 129,456
Middle East & Africa 117,999 134,568 136,606 136,759 141,937
South & Southeast Asia 144,788 174,934 178,469 171,600 185,279
East Asia & Australia 45,100 49,951 56,163 62,653 74,750
Latin America & Canada 63,749 72,293 80,738 84,223 87,938

In 2019 the UK government published a green paper setting out how they planned to tackle the
preventable causes of ill health in the country including the aim to end smoking in England by the
year 2030.8 The rhetoric from the government was not unexpected. In the previous decade, UK
governments had placed increasing pressure on the industry through legislation such as the plain
packaging law passed in 2015. The law prohibited the use of logos or brand imagery on cigarette
packaging requiring instead that packaging must be plain coloured with graphic warning imagery.
The effect of this legislation was not only significant but immediate. PMI’s rival Booker Group
reported a 7.7% decline in tobacco revenues within the first financial quarter after the legislation
came into effect.9

Increasing awareness of the health risks associated with smoking, such as lung disease and cancer,
has led to a long‐term decline in smoking rates. The trend is expected to continue and was
accelerated by the Covid‐19 pandemic. Given the way Covid‐19 affects the lungs, many smokers
were motivated to reduce or to quit smoking during the pandemic. According to a report by
University College London and Action on Smoking and Health, over a five‐week period in the
summer of 2020 more than one million people had quit smoking and a further 440,000 had tried to
quit.10

Health consciousness has also increased competition for cigarettes from newer, lower risk
substitute products, particularly e‐cigarettes. E‐cigarettes are seen by many as a tool to help quit
smoking. A study by the ONS found that nearly 51% of all e‐cigarette consumers were using them
to give up traditional cigarettes. A House of Commons investigation on e‐cigarettes concluded that
e‐cigarettes were roughly 95% less harmful than traditional cigarettes. E‐cigarettes have, therefore,
become not only a means to quit smoking but also a less harmful alternative.11

BEYOND NICOTINE
In his first address as CEO, Olczak articulated a bold vision for PMI’s response to the threats in the
macro‐environment. “Our evolving portfolio will drive our long‐term future. We will lean into our
scientific research and expertise, using our collective skills and imagination to innovate beyond our
existing portfolio and explore new areas of business development.”12 What followed was a
diversification strategy considered radical within the industry: PMI was going to diversify away from

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being a tobacco company into becoming a health and wellness business. It also made the bold claim
that the firm would stop selling its iconic Marlboro brand in the UK within 10 years.13

At the heart of this move is the firm’s Beyond

Nicotine strategy which sets out two areas of
focus for growth. First, to create a
development pipeline of inhaled medicines
and therapeutics and, second, to develop
and commercialise science‐backed health
products tackling commonplace problems
such as energy, calm and sleep. PMI aims for
its Beyond Nicotine products to provide the
company with $1 billion in net revenue
annually by the year 2025.14

PMI has moved fast to implement its Beyond Courtesy PMI press
Nicotine strategy through acquisitions. In
July 2021 it acquired Fertin Pharma for approximately $820 million. Fertin Pharma makes oral
pharmaceutical and wellbeing products – such as tablets, gums, lozenges and pouch powder – and
is a leading producer of nicotine replacement solutions.

“The acquisition of Fertin Pharma will be a significant step forward on our journey toward delivering
a smoke‐free future—enhancing our smoke‐free portfolio, notably in modern oral, and accelerating
our progress in beyond nicotine,” Olczak noted at the time. PMI’s objective for acquiring “Fertin’s
diverse portfolio of technologies, evolving business mix, and world‐class expertise” was to build
scientific capabilities and a new product pipeline which could provide it with “speed and scale in
oral delivery” towards its target of more than half of net revenues to come from smoke‐free
products by 2025.15

In August 2021, PMI acquired the US‐based respiratory drugs developer OtiTopic. PMI’s key
objective in this move was to acquire OtiTopic’s ASPRIHALE®, a patented but ‘approval pending’ dry
powder form of acetylsalicylic acid (aspirin) which is self‐administered using an aerosol unique to
the company. In trials ASPRIHALE® was found to achieve desired results faster than traditional
chewable aspirin and could have a significant impact in improving the survival of patients at risk of
heart attacks. The acquisition of OtiTopic was another step towards Beyond Nicotine and created
synergies with PMI’s existing specialised capabilities. As Olczak commented on the announcement
of the acquisition, PMI had “… world‐class expertise in the research, development, and
commercialization of aerosolization and inhalable devices to help speed the delivery of this exciting
product to market”.

ACQUIRING VECTURA
After a short bidding war with a private equity fund, PMI’s £1 billion acquisition of the UK‐based
pharmaceutical firm Vectura Group was announced on 9 July 2021. Vectura develops both inhaled
medication for respiratory illnesses and the devices that deliver these medications, such as inhalers
and nebulizers. The company’s customers include firms such Novartis and GlaxoSmithKline. In 2020,
it posted revenues of £191 million.16 Vectura often collaborates with other pharmaceutical firms to
produce inhaled medication, for example, they agreed a deal to develop an inhaled Covid‐19
treatment with the firm Inspira.17

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For PMI, Vectura’s capabilities related to development and manufacturing of complex inhalation
devices were very attractive.18 The acquisition expands PMI’s scientific knowledge and gives it “that
missing capability in order to develop products that have nothing to do with nicotine,” stated
Olczak.19 It also provides PMI with speed. Without the acquisition the development of new inhaled
products would take much longer; in a nutshell, the Vectura acquisition offers Olczak with a “unique
opportunity to reinvent his company”.20

PMI plans to operate Vectura as an autonomous business unit, allowing the firm to form the spine
of PMI’s inhaled medicines and therapeutics business. Working together with OtiTopic and Fertin,
Vectura gives PMI with the capabilities to offer end‐to‐end development of inhaled drugs and their
respective devices, improving the likelihood of achieving its target of 50% net revenues from smoke‐
free products. In return, PMI provides Vectura and the other acquisitions with key corporate
capabilities in such areas as global reach, access to markets, clinical development and regulatory
affairs.21

Both Vectura and PMI executives expressed optimism about the deal. When the acquisition was
announced, Olczak stated, “The market for inhaled therapeutics is large and growing rapidly, with
significant opportunities to address unmet needs.” He expected the two companies to jointly invest
their resources “to accelerate our long‐term growth in beyond nicotine products, which is a core
strategic focus for PMI.”22 Bruno Angelici, the Chairman of Vectura, also referenced new product
development in his remarks. “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.”23

SMOKE & MIRRORS

PMI’s strategy to transform itself into a health and wellness business through acquisitions met with
strong criticism from various external stakeholders. Opponents of the deal questioned the ethics of
a cigarette maker taking over a firm which treated diseases caused by smoking. A spokesperson for
Cancer Research UK declared, “It’s unethical for big tobacco to be allowed to profit from treating
diseases made far more prevalent because of its products.”24 Similar opinions “questioned the ethics
of a cigarette maker owning a drug maker that develops treatments for respiratory illnesses”.25

Even the British Medical Journal got involved with an opinion piece carrying the subheading
“Everyone except the tobacco industry stands to lose,” implying that PMI’s motives could not to be
trusted.26 PMI’s ironic predicament – a cigarette maker buying a pharmaceutical company – seems
to have given rise to many of the misgivings. Whereas PMI sees the potential to use Vectura’s
technology and expertise to pivot into new lines of business, Vectura’s makes most its money from
treatments of diseases such as lung cancer and COPD (Chronic obstructive pulmonary disease).27

Another line of criticism highlighted the potential impact on the scientists working at Vectura.
Shortly after the deal was announced, Dr Nick Hopkinson, chair of Action on Smoking and Health,
was quoted in The Guardian saying, “Once you work for the tobacco industry, that’s you and your
reputation. It stays with you.” So, scientists working for Vectura, “may no longer be able to
collaborate with their peers.”28 Part of the problem was that “professional societies for specialist
respiratory scientists and clinicians did not allow them to participate in any events with links to the
tobacco industry.” Within hours of the deal being confirmed, Vectura was removed both “as a
sponsor of, and participant in, a conference called Formulation and Delivery UK,” scheduled to take
place the following week.29

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Responding to the criticism, Vectura board of directors drew attention to the expectation “that
wider stakeholders could benefit from PMI's significant financial resources and its intentions to
increase research and development investment and to operate Vectura as an autonomous business
unit that will form the backbone of its inhaled therapeutics business."30 Nevertheless, several large
shareholders – including Blackrock, Abrdn and Natixis – sold their shareholding in the company on
the day PMI announced they had secured a 22.61% stake in Vectura.31

Olczak confessed that opposition to the deal “was a bit of a surprise”32 and wondered whether critics
were "not interested in progress" but rather in "settling old scores" with the tobacco industry.33

Despite calls for the government to intervene and for shareholders to reject the deal, PMI acquired
97% of the shares in Vectura permitting it to compulsorily buy the rest.34 Vectura was delisted from
the London Stock Exchange in October 2021 and relisted as a private company wholly owned by
Philip Morris International.

*****

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