What happened

Shares of 22nd Century Group Inc. (NYSEMKT:XXII), a small-cap biotechnology company focused on tobacco, rose 25.9% in September, according to data from S&P Global Market Intelligence. The Food and Drug Administration's plan to reduce cigarette nicotine levels has been boosting the stock all year, and more good news about the company's intellectual property kept the party going last month.

So what 

This summer, recently appointed FDA Commissioner Scott Gottlieb outlined a plan to finally use powers granted by the Family Smoking Prevention and Tobacco Control Act. The law, enacted in 2009, gives the agency the power to regulate levels of nicotine and other harmful compounds that cigarette smokers inhale each day.

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How would 22nd Century Group benefit from potential regulation? The company claims its patent portfolio makes it "the only company" on the planet capable of supplying America's $130 billion tobacco industry with leaves that contain nonaddictive nicotine levels. An agreement with British American Tobacco that had been preventing the company from seeking new partnerships came to an end last month.

Now what

Without a doubt, 22nd Century Group's patent portfolio positions the company for explosive gains, but that doesn't mean the stock isn't terribly risky. The not-yet-profitable company's market cap has more than doubled to $292.4 million since Gottlieb announced the FDA's renewed interest in tobacco regulation, even though the company has yet to book any revenue from its proprietary very-low-nicotine tobacco. 

If the FDA quietly abandons plans to lower cigarette nicotine levels, 22nd Century would be left with products such as filtered cigars, which it can't seem to sell at a profit. Although product sales are on the rise, the company's cost of goods sold came in at 104.2% of net sales revenue in the second quarter.

Although the general public would like to see the FDA finally use powers enacted eight years ago under President Obama while Democrats controlled Congress, forcing the tobacco industry to fill cigarettes with low-nicotine tobacco is just the sort of regulatory overreach vehemently opposed by the Trump administration. Given the administration's unpredictability, it might be best to watch this story unfold from a safe distance.

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