22nd Century Offers A Unique Opportunity In The Market For Tobacco Harm Reduction Products
The company on the mission to reduce the harm from smoking got a key nod from the Federal Drug Administration (FDA). Despite growing revenue and positive clinical trials, 22nd Century Group (XXII) has struggled to obtain the breakthrough approval to market their plant biotechnology that allows for the increase or decrease of the nicotine level in tobacco products.
The stock has traded roughly flat for over two years now with an upper limit of $1.50. The question now is whether work with the FDA will provide the impetus for significant future revenue growth or a major licensing deal with a strategic partner leading to a breakout in the stock.
BRAND B
On Monday, 22nd Century announced that the FDA had granted the company authorization to conduct a clinical trial studying of the Company's BRAND B product that offers a low tar-to-nicotine ratio cigarette. The product proposes to provide smokers with reduced exposure to smoke to reduce the harm to the smoker and the general public.
Considering that, a lot of smokers don't wish to quit smoking, products that reduce the harm of smoking are potentially the future. The Center for Disease Control and Prevention (CDC) reported that 12 million smokers have no desire to quit smoking. The low tar cigarette would reduce the harm to smokers and the research shows that this group of diehard smokers would be willing to accept such a product.
22nd Century plans to submit a Modified Risk Tobacco (MRTP) application to the FDA for BRAND B.
Very Low Nicotine
The real corporate focus in on the very low nicotine (VLN) tobacco products that reduce the nicotine in cigarettes by up to 95%. The World Health Organization (WHO) previously published an advisory note proclaiming a recommendation that cigarettes should be limited to those with a nicotine content below a level sufficient to develop or maintain an addiction.
The WHO recommended that the threshold for addiction wasn't identified, but the amount of nicotine is possibly less than 0.4 mg/g of dry cigarette tobacco filler. Enter 22nd Century into the picture as the company with the tobacco product able to meet the conclusion of the health organization.
Previously, the FDA provided feedback on the BRAND A product. The Center for Tobacco Products provided clarifying guidance leading the company to bifurcate its combined MTRP application into a separate Premarket Tobacco Product (PMT) application and a separate MRTP application. The application will include additional scientific data from already completed clinical studies and allow for the benefit of a shorter review period for PMT applications.
22nd Century is requesting the ability to package and advertise BRAND A VLN cigarettes as reducing smokers' exposure to nicotine due to containing 95% less nicotine than the tobacco contained in traditional cigarettes. A prime example of the studies was the recent work by the New Zealand Government published in the journal Nicotine and Tobacco Research that backed the VLN cigarettes as a tobacco control strategy. The country has a goal of being smoke-free by 2025 and suggests making the VLN cigarettes a cheaper alternative to conventional products would naturally lead to a reduction in smoking addiction.
Reasonable Financials
The interesting part of the story with 22nd Century is that the company already sells branded tobacco products. The company generated over $12 million in revenue during 2016, up nearly 50% from $8.5 million in 2015. The company continues to report quarterly losses similar to any relatively small biotech company, developing revolutionary products and undergoing clinical research studies.
The Q4 net loss was $2.8 million and the company listed the monthly cash loss at $750,000. With roughly $13.4 million in cash at the end of the year, the company used these numbers to project enough cash for operations and clinical trials through March 2018.
Numerous investors naturally suggested the company should reduce sales and marketing efforts of existing money-losing products and focus efforts entirely on obtaining international regulatory approvals of the above-mentioned products. Management decided to continue selling existing products that include contracts that provide for revenue growth in 2017 while shifting efforts to the regulatory approvals that could provide significant upside opportunities.
With a listed market cap of $125 million, the stock is intriguingly valued considering the potential upside. The risk is nearly as similar to any small biotech. The lack of an FDA approval could dramatically impact any significant revenue upside and the company hasn't shown the ability to turn profitable from existing sales.
Other regulatory approvals are possible including in the U.K. though the company likely runs into the need to raise additional funds in that scenario. Such a move is very reasonable for a company in this position and nothing alarming for investors.
Takeaway
The key investor takeaway is that 22nd Century Group offers multiple paths to rewarding shareholders. Both the BRAND A and BRAND B products are working on paths to FDA approval. As well, the company is working on industrial hemp solutions and prescription based cessation products amongst others with only one major product approval needed to move the stock above the recent trading range below $1.50.
The stock offers interesting potential though facing larger competitors that could always throw roadblocks into the regulatory approval process. Regardless, 22nd Century provides a solid risk/return scenario for investors willing to accept the loss of capital.