Around 249 billion cigarettes were sold in the United States last year, and if the Food and Drug Administration gets its way, in the future all the cigarettes sold here will be made with tobacco that contains very little nicotine. There's a chance that 22nd Century Group, Inc. (NYSEMKT:XXII) could become an important supplier of low-nicotine tobacco in the U.S. In fact, the company appears so far ahead of the competition's efforts to meet the potential new rules that it might become the country's only tobacco supplier.
Stocks that look too-good-to-be-true usually are, but 22nd Century Group could make investors rich if it becomes the country's sole tobacco supplier. Let's see if the potential outweighs some troubling risks.
20 years of exclusivity ahead?
The FDA wants to make cigarettes far less habit-forming by lowering their nicotine content to nonaddictive levels. That doesn't mean it wants everyone to switch to silver brands or other innocuous-seeming colors, because those descriptors simply refer to the amount of ventilation at the filter.
Instead, the FDA issued an advance notice of proposed rulemaking (ANPRM) to lower the nicotine content in the tobacco itself. In response to the agency's proposal, British American Tobacco (NYSE:BTI) claimed it would take it another 20 years to produce the sort of tobacco the agency has in mind at a commercial scale. Recently, Bloomberg reported a similar claim made by the director of product policy at Philip Morris International (NYSE:PM).
Patents held by 22nd Century are one of the roadblocks British American Tobacco cited when responding to the ANPRM in July. Of course, 22nd Century was quick to point out that it's prepping enough seeds to replace the entire U.S. tobacco crop with low-nicotine plants that Philip Morris and British American can license for a significant fee.
A shot at an elusive title?
While there's a chance that 22nd Century could become the country's only tobacco provider, some investors are hoping it won't need the FDA to throw a monkey wrench in the tobacco industry's gearbox. The company's putting together an application to market its very low nicotine tobacco, or VLN Tobacco, as an official Modified Risk Tobacco Product (MRTP).
So far, the FDA has shot down every attempt the tobacco industry's made at labeling tobacco products as less risky than cigarettes, and an application to apply a modified-risk label to Philip Morris International's popular IQOS device doesn't seem to be going anywhere. Earlier this year, a federal advisory panel voted 5-to-4 against the claim that using the device, which heats but doesn't burn tobacco, is less harmful than continuing to smoke regular cigarettes.
Reasons to back away
There isn't any chance the FDA will allow products containing 22nd Century's VLN Tobacco to be marketed as a low-risk option to traditional cigarettes. The company might be able to show it's less addictive because it contains less nicotine, but Congress charged the FDA with ensuring any statements about modified-risk products relate to the overall disease risk of the product.
Nicotine is hardly the only molecule that makes its way through a cigarette filter that upsets the FDA. Although the addictive substance is thought to assist cancer development, it isn't a direct carcinogen itself. Until 22nd Century finds a way to eliminate compounds that undoubtedly contribute to tobacco-related cancer, investors better forget about this company, or any of its potential partners, marketing "low-risk" cigarettes.
Right now, 22nd Century Group is a $290 million company with operations that lost around $19 million over the past year. While there's a chance it can market cigarettes as less addictive, it seems like an awfully tough sell. The company told us it was accelerating the rollout of a low-nicotine brand in Europe more than two years ago but sales so far haven't been worth mentioning.
Unless the FDA strong-arm's the U.S. tobacco industry into signing extremely lucrative licensing deals by implementing its proposal, I don't see anywhere for this stock to go but down. It could happen, but it hardly seems like a risk worth taking, no matter the potential upside.