What happened
22nd Century Group (XXII 2.99%) looked like it was on track to end 2021 exactly where it started. Just three days before Christmas, the stock of the tobacco harm-reduction biotech was trading at exactly the same price where it started the year.
Yet the very next day, 22nd Century shares rocketed higher and it ended the year up 40% from last year. According to data provided by S&P Global Market Intelligence, the reduced-nicotine tobacco company enjoyed a one-month gain of 23.1% in December.
The reason? The Food and Drug Administration approved 22nd Century Group's application for low-nicotine content combustible cigarettes as a modified risk tobacco product (MRTP). CEO James Mish said, "This is the first, and most likely will be the only, combustible cigarette to ever carry the FDA's MRTP designation."
Image source: Getty Images.
So what
Traditional cigarettes, of course, are in a secular decline and have been for decades. Smokers are either quitting or increasingly switching over to electronic cigarettes.
Tobacco giants like Altria, British American Tobacco, and Philip Morris International are counting on e-cigs to be the future of the industry, and both Philip Morris and British American have won FDA approval for their next generation products.
The former got a reduced-risk label for its IQOS heated tobacco device while the later won approval for its Vuse brand of vapor devices, the first of its kind in the U.S. British American recently successfully petitioned the International Trade Commission to ban the importation of the IQOS into the U.S., giving it a competitive edge and underscoring just how crucial the tobacco companies view the e-cig market is to their future.
Image source: Getty Images.
But 22nd Century Group is targeting the millions of smokers who don't necessarily want to switch to an electronic device. By marketing a reduced-nicotine content cigarette to them as a more healthy alternative to traditional cigarettes, the company has a large, competitive edge because there are still so many more people who smoke compared to those who use an e-cig.
Now what
As promising as the development is for 22nd Century Group, analysts are still unsure of whether the cigarette maker can scale up production enough to make an appreciable mark in the market. In the third quarter alone Altria shipped over 23.1 billion cigarettes.
Some anti-smoking advocates also argue low-nicotine cigarettes will actually cause people to smoke more or inhale more deeply in an attempt to obtain the same level of nicotine they received previously.
Now that 22nd Century Group has the FDA's imprimatur to move forward, investors in the tobacco stock need to see whether the hope for a healthier combustible cigarette is real or will go up in a puff of smoke.
