The Food & Drug Administration (FDA) is busy these days. Even as a recent decision could effectively hand the electronic cigarette market to British American Tobacco (BTI +0.67%) by banning chief rival Juul Labs from store shelves, it has also taken another momentous step that could lift a small, largely unknown tobacco stock to prominence.
The FDA announced that it will publish a new rule next year to eliminate virtually all nicotine from cigarettes sold in the U.S. If approved, it could catapult tiny tobacco company 22nd Century Group (XXII +11.62%) to the top of the cigarette industry because it already grows tobacco with up to 95% less nicotine than the tobacco used in conventional cigarettes.
Shares of 22nd Century have shot up almost 60% since the plan was announced, and it could be the company that cigarette makers turn to in a bid to comply with new regulations. It may be years before anything is decided, but the low-nicotine tobacco grower will be one to watch.
Image source: Getty Images.
Upending the tobacco industry
Mandating very low nicotine content (VLNC) cigarettes has been on the FDA's radar for years, and its announcement pointed to a 2018 paper published by the agency in the New England Journal of Medicine contending that 33 million people could be prevented from becoming smokers by adopting this rule.
The agency needs to do an end run like this to crush the tobacco companies because, by federal law, the FDA is not allowed to ban cigarettes outright. How close to the line it can go remains to be seen.
Under the Family Smoking Prevention and Tobacco Control Act, which gave the agency the power to regulate tobacco, the FDA is prevented from outlawing cigarettes, implementing standards that are technically impossible to achieve, or reducing nicotine to levels that would effectively make them zero.
This proposal will, undoubtedly, be legally challenged by the tobacco giants Altria (MO +0.69%) and British American -- and it is why it will be a long time before any rule takes effect. But 22nd Century could still benefit from the process.
Image source: Getty Images.
A safer cigarette
The tobacco company, which bills itself as an agricultural biotech, naturally came out in support of the proposal, and notes it is already selling the first and only cigarette with nicotine content that's been reduced by 95%. It was given the FDA's stamp of approval to carry a modified-risk tobacco product (MRTP) designation, and 22nd Century is required to include a "Helps You Smoke Less" label on the packaging, which could give it a competitive advantage.
The VLNC cigarettes are only available in the Chicago area as 22nd Century pilots their sale, but it says initial results suggest demand is there, and a national rollout could become a reality. Its VLN brand is approved for sale in nine states, and it has applied for approval in all the rest. It also launched in South Korea in March.
First-quarter revenue was $9 million, up 33% from last year, primarily from the research market for which the bulk of its cigarettes are sold, but losses swelled by 84% to $9.3 million.
NASDAQ: XXII
Key Data Points
Although 22nd Century is expanding its production capacity by 25% with a new 62,000-square-foot facility, there is still a question of whether it can scale up enough to meet market needs. As of May 5, it had only produced some 33 million VLNC cigarettes, mostly for research, while in comparison Altria shipped some 20.6 billion cigarettes for the period.
One to watch
The real opportunity could be in partnerships 22nd Century might sign with the tobacco giants. If Altria or British American need to quickly ramp up their own VLNC cigarettes, the agricultural biotech might be the one to which they will turn. British American previously had partnered with 22nd Century to produce a low-nicotine cigarette, but it eventually ended the relationship in 2017, which some suggested meant it was not a viable product at scale.
The FDA is scheduled to publish a proposed rule in May 2023 after which it would invite public comment. Big Tobacco will almost certainly sue to prevent nicotine being reduced to near zero, arguing in part that the agency has gone beyond its legal purview, but also because, as Altria charges, the levels that the FDA has discussed are not technically feasible and not supported by science. Additionally, Big Tobacco could argue that it would create a black market in traditional cigarettes with all the attendant problems that prohibition brings with it.
Just the discussion, though, will bring greater attention to 22nd Century Group, and investors should at least keep an eye on what could become a major tobacco industry player overnight.
