Health care stocks have been on a tear recently, and you can't help but sympathize with companies looking to get a piece of that action for their shareholders. You probably wouldn't associate major tobacco giant Philip Morris (PM 0.74%), one of the largest members of an industry routinely accused by political pundits of destroying health, to be among them.
Bizarrely, tobacco has caught on as the latest promising producer of flu vaccines -- to the point where even the military's mad scientist lab, DARPA, is funding tobacco-based vaccine research. Now Philip Morris wants a shot at expanding this growing business into China.
Not exactly business as usual
China boasts an absolutely enormous market for smoking -- it's estimated that the country has 350 million smokers -- but Philip Morris can't get its hands on all that potential revenue. Why? China National Tobacco, a state-owned enterprise, runs a virtual monopoly on the industry. The company racks up more profits annually than the likes of Wal-Mart. Multinational corporations like Philip Morris and British American Tobacco (BTI 0.47%) can't get any of that money, however -- the Chinese government certainly doesn't want to see it leave China's shores. Philip Morris records a market share of less than 1%.
So if you can't beat them... adapt to making vaccines. That's Philip Morris' thought anyway, and who can blame it? The Chinese pharmaceutical market is the largest in Asia, with pharmaceutical sales expected to reach $200 billion by 2015. Companies like Pfizer (PFE -5.12%) and GlaxoSmithKline (GSK 1.61%) have made significant efforts recently in shifting investment toward China in the hopes of reaping that tantalizing reward.
Philip Morris won't be the first to investigate tobacco's vaccine capabilities, either -- so it's not quite uncharted ground, especially for a company that knows this plant backward and forward. Philip Morris announced that it will license tobacco-based flu vaccine rights from small Canadian biotech company Medicago. Philip Morris holds a 40% stake in Medicago --the same biotech company funded by DARPA dollars in the hopes of establishing a vaccine that could have production jump-started rapidly and on a massive scale.
It's reassuring to know that in the event of a flu pandemic, our hopes are all riding on tobacco.
Smoke – or vaccinate – if you got 'em
Still, cracking the Chinese pharmaceutical nut will be no easy task. China's government has levied a series of price-cutting policies on drugs in order to make medication cheaper for its populace. While that might help out the average citizen, the policies aren't so good for companies looking to make a buck. There's certainly plenty of profit to be made in the country, but Philip Morris will find it tricky to navigate the labyrinthine Chinese bureaucratic architecture.
It'll be years before you see any returns from this deal, particularly since vaccines stray pretty far from Philip Morris' smoking business. Still, since the company's licensing the vaccines from a member of the industry -- and it just might have plenty of tobacco knowledge itself -- I don't think it's far-fetched to expect Philip Morris to succeed, as long as the vaccines can clear clinical trials. Success won't blow the doors off the company's share price, but this plan could deliver an important -- and potentially lucrative -- first step into China.