Phillip Morris International Inc. (NYSE: PM), the world's second-largest tobacco company by sales, is partnering with Canada's Medicago Inc. to develop experimental flu vaccines in China, part of its effort to capture business in new markets.

Richmond, Va.-based Philip Morris' subsidiary Philip Morris Products SA (PMP) will pay Quebec City's Medicago $4.5 million immediately, with an additional $7.5 million for royalty payments on future sales of the drug, which is based on tobacco leaves. Separately, Medicago will pay $700,000 to Philip Morris for plant-based protein development technology.

Medicago is 40 percent owned by Philip Morris, which sells the Marlboro and Virginia Slims brands.

"We look forward to working closely with PMP to develop our pandemic and seasonal influenza vaccine candidates in the coming years," said Andy Sheldon, CEO of Medicago, in a statement. "Strengthening our virus-like particles platform and international expansion to emerging markets like China is a key component of our growth strategy, and this partnership represents an important milestone in achieving this strategy."

Medicago's interim data is expected in the first quarter of 2013, along with the testing in partnership with the Infectious Disease Research Institute, the company said. Medicago said it was also working with Mitsubishi Tanabe Pharma Corp., a subsidiary of Mitsubishi Chemical Holdings Corp. (Tokyo: 4188).

Philip Morris International was spun off from Richmond, Va.-based Altria Group Inc. (NYSE: MO), which sells the same cigarette brands in the U.S. Philip Morris International operates outside the U.S. in around 180 countries.

Shares of Philip Morris fell 78 cents, or 0.85 percent, to $90.50 in late Tuesday trading.