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Why 22nd Century Group Stock Is Up Less Than 2% So Far in 2018

By Nicholas Rossolillo - Nov 18, 2018 at 4:00PM

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A potential monopoly on tobacco supply isn't enough to stand on in a declining industry.

Shares of plant biotechnology company 22nd Century Group (XXII 6.57%) closed Friday up just 1.4% for the year, making 2018 so far a disappointing year for investors after a huge 150%-plus surge in 2017. Hope and speculation that the company's patents on low-nicotine tobacco plants could lead to a monopoly -- or at the very least to a big increase in sales -- in the cigarette industry have been buoying investors, along with optimism about its work developing cannabis plants with no THC. But realization has begun to set in that the road ahead could be harder than once thought.

What happened this year?

Big tobacco companies continue to face difficulties in dealing with regulators around the world. Hong Kong has banned electronic cigarettes, for instance, while the U.S. Food and Drug Administration has been reluctant to give the OK on deeming products as modified risk tobacco products (MRTP). 

A closeup shot of cigarettes on a manufacturing line.

Image source: Getty Images.

22nd Century Group has patents on plants that contain lower amounts of nicotine and lower tar-to-nicotine levels, which could help smokers who want to quit wean themselves off the habit. The company hopes its plants will get approval as MRTP, or even a non-habit-forming product, as the FDA has given advance notice on proposed rulemaking to reduce nicotine in cigarettes in the U.S. to non-addictive levels. However, there is no guarantee the FDA would give 22nd Century the OK to sell its products as such. It's a long, drawn-out process to get FDA approval, especially on anything related to the tobacco industry.

The company has another line of potential in its genetically modified marijuana products, which have lower or modified levels of cannabinoids. With medical and recreational use of marijuana on the rise around the world, there is optimism that demand for 22nd Century's cannabis plants will rise, too.

Sales up; profits still elusive

Any business scrutinized as closely as tobacco and marijuana is complicated and fraught with setbacks. Such is the case here, as expenses this year have skyrocketed even as 22nd Century's sales have climbed.

Metric

9 Months Ended 09/30/18

9 Months Ended 09/30/17

% Change (YOY)

Net sales

$19.29 million

$10.66 million

81%

Operating income (loss)

($18.22 million)

($9.53 million)

N/A

Net income (loss)

$952,000

($9.29 million)

N/A

Adjusted EBITDA

($14.55 million)

($8.25 million)

N/A

Data source: 22nd Century Group quarterly earnings. YOY = year over year. EBITDA = earnings before interest, taxes, depreciation, and amortization. 

Sales are up this year as there have been more orders for 22nd Century's low-nicotine tobacco products for clinical studies. However, while several million cigarettes may sound like a big order, it isn't the type of manufacturing scale that produces profitable revenue. Plus, the company's applications with the FDA for modified risk tobacco products (MRTP) are expensive, to the tune of $7.2 million so far in 2018.

As for the net profit, that was due to 22nd Century realizing a gain on its investment in cannabis testing and genetics company Anandia Laboratories when it was bought out by Aurora Cannabis. Excluding that one-time gain, net losses have been mounting as well.

At this point, 22nd Century's market cap is $327 million, putting the price-to-sales ratio at a steep 13.9. That's a rich price tag for a tiny company whose fortunes are pinned on FDA rulings and rule changes. Even if 22nd Century Group lands major victories with regulators around the world, it's important to remember that smoking has been in decline for decades. The company's aim to provide non-addictive or lower-nicotine product is noble, but smokers quitting doesn't exactly set business up for long-term growth. The stock is a speculative play with limited upside beyond a major shakeup in the rules governing the tobacco industry.

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XXII
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