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Despite the unanimous decision by the board of Vectura Group (LON:VEC) to recommend Philip Morris International’s (NYSE:PM) most recent 165p per share offer to shareholders, the story is not over yet.

The share price of the Chippenham-based inhaler company is at 164p and there are still two weeks to go before the shareholders need to decide. Charities such as Asthma UK and the British Lung Foundation as well as Cancer Research UK and Action on Smoking and Health are urging shareholders not to accept the deal. Meanwhile, Jacek Olczak, PMI’s CEO published an op-ed in The Telegraph on 20 August justifying the firm’s reasons for targeting Vectura.

Philip Morris International soon to be a smoke-free zone

Whether the takeover goes ahead or not, PMI’s move away from cigarettes is well under way. Today, 30% of PMI’s revenues are from smoke-free products, up from essentially zero in 2015 and the company aims to be majority smoke-free by 2025.

Philip Morris International has four smoke-free products (nicotine-containing tobacco vapour products which do not involve burning and smoke) in various stages of development and commercialisation. The heated tobacco system IQOS, the first of these products, has already been launched in various markets around the world and in the pipeline are carbon-heated tobacco and e-vapor products as well as STEEM which generates a nicotine-containing vapor in the form of a nicotine salt.

The firm is seeing strong growth momentum in the IQOS smoke-free tobacco products. Its second quarter results estimated that 20 million total users have driven sequential quarterly heated tobacco unit in-market sales volume growth of 8%.

And in a further move away from cigarette sales, on Friday, PMI published a framework where the firm plans to issue business transformation-linked financing instruments in the debt capital and loan markets.

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Improved ESG ratings

Philip Morris International’s move away from its legacy business has already had an impact on its ESG ratings. In May this year, even before the Vectura takeover bid, an S&P Global Ratings’ ESG Evaluation report confirmed that Philip Morris International has positively differentiated itself within the tobacco sector.

“S&P Global Ratings recognises PMI’s work in delivering a smoke-free future. We believe PMI is adequately prepared for future disruptions, reflecting its significant investments in reduced-risk products, which smokers seem to accept as an alternative to cigarettes, and its solid track record of strategic execution despite headwinds,” stated the report.

Philip Morris InternationaI’s retreat from a declining industry will undoubtedly transform its value in the long run, although short term, it could result in a shifting investor base and subsequent share price movement. Similarly, if PMI pursues an acquisition strategy, this could affect the dividend policy too.

Nevertheless, PMI’s share price has been hovering around the $100 mark since mid-June and at time of writing, the share price at $103.07 is at a 52-week high. The second quarter results resulted in a temporary dip in the share price to $94.93.

The acquisition of Vectura Group certainly accelerates Philip Morris International’s Beyond Nicotine Strategy and may well form what Olczak calls the backbone of the company’s inhaled therapeutic business. Whether shareholders vote for the deal on 15 September is another matter.


Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Philippa Aylmer

Philippa Aylmer

Philippa Aylmer is a freelance writer within the investment management sector.

She began her career in the late 90s writing about emerging markets for the Euromoney titles while based in Pakistan. Since then, she has covered hedge funds, ETFs, wealth management and fintech.

As well as news, on the client side, Philippa advises on media relations and editorial strategy, writing about the topical and technical issues of investment management

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