Cigarettes just might be getting a whole lot less stimulating, per a new rule limiting the amount of nicotine in cigarettes being proposed by the regulators at the Food and Drug Administration (FDA). While the proposed rule probably won't be finalized enough for the public to comment on it until mid-2023, it's being pursued by the Biden administration because it would support the president's goal to significantly reduce the U.S. cancer death rate over the coming decades. And if the rule is ultimately adopted, it'll upend the entire cigarette industry, likely laying waste to players whose products don't meet the new ceilings on nicotine content, which is practically all of them.
There is a relatively unknown business that'll flourish under the new limits, though: 22nd Century Group (XXII -2.33%). In fact, the stock has a realistic chance of multiplying by 10 times over the coming years if the limit is imposed.
This company is already succeeding with low-nicotine products
You probably haven't heard of 22nd Century Group's tobacco products because it isn't (yet) a major competitor in the cigarette industry, and it's debatable whether it's correct to call it a cigarette stock at all. Since getting the FDA's approval in late 2021, it makes cigarettes with very low nicotine content, which regulators explicitly endorse as being less risky than the alternatives. Low nicotine cigarettes are less addictive, making them a good tool for people trying to quit smoking.
The company also uses genetic engineering to create higher-yielding cannabis plants with defined quantities of psychoactive compounds. It has several similar genetic engineering programs for hops -- cannabis-related plants used in the brewing industry -- as well. So despite the recent launch of its low-nicotine cigarettes, it's a plant genetics biotech at heart, and its opportunities for growth are spread across multiple industries.
Given that 22nd Century is currently the only company with a low-nicotine cigarette product on the market right now, it's exceptionally well-positioned to thrive in the face of the potential new regulations. It won't need to change its main product or its marketing in any way to stay in the good graces of regulators, and it would have the advantage of being first to the market. It'll also have the opportunity to license the technology it uses to reduce nicotine levels in cigarettes to other manufacturers, who would be scrambling to salvage their businesses in any way possible. That's a powerful set of tailwinds, to say the least, and they could result in a big payoff for investors.
It won't need much market share to explode in value
More than $90 billion worth of cigarettes were sold in the U.S. in 2019. Management estimates that around 60% of adult smokers would be willing to use a cigarette with low nicotine content. If you multiply those two figures together, you get $54 billion, which is a decent back-of-the-napkin calculation for 22nd Century's total addressable market in the U.S.
Right now, the company's trailing-12-month revenue is near $33.2 million. Capturing a mere 0.06% of the domestic market -- that's less than a single percent -- would mean annual revenue in excess of $324 million, which would imply growth of nearly 10X compared to where it is today. And that figure doesn't even take the impact of the Biden administration's suggested nicotine limits into account.
If the proposed rules are enacted, cigarette users simply won't have a choice about whether to consume low-nicotine products or not, and 22nd Century's addressable market would be the entire $90 billion instead, so it could ultimately grow even larger. For now, its stock is flying, but the real gains could lie over the next few years, which makes it an attractive purchase for risk-tolerant investors. Be on the lookout for further communications from regulators about the nicotine limits, and expect 22nd Century to remain ahead of the curve all the while.
