With the Food and Drug Administration (FDA) signaling in June that it's developing a proposal for a new set of standards that would put a hard cap on the level of nicotine allowed in cigarettes to reduce their addictiveness, shares of 22nd Century Group (XXII -26.31%) are burgeoning, rising by around 16.6% over the last 30 days.

The biotech isn't a traditional cigarette business, nor is it well-known, but there's no doubt that the Biden administration's regulators created what may become a transformative opportunity for the company. Here's why.

It's already way ahead of the regulatory curve

In the FDA's announcement, regulators justified the need for new rules by pointing to research showing that many people want to quit smoking but can't due (obviously) to the highly addictive nature of nicotine. The rationale is that if cigarettes had dramatically lower levels of nicotine, they wouldn't hold as much sway over people.

Needless to say, such limits would probably devastate cigarette manufacturers like Altria and Philip Morris. But in theory, cigarette companies could voluntarily reduce the levels of nicotine in their products to comply with the proposed rules, assuming they ever get clarified, endorsed, and enforced. Such a pivot would imply significant costs, and it would also shake up the cigarette industry's competitive landscape, likely breaking the stranglehold of the current crop of dominant players. 

That's where 22nd Century comes in. As a plant genetics biotech, its expertise is in using genetic engineering to tailor the yield of the psychoactive chemicals in cash crops like cannabis, hops, and yes, tobacco. And in late 2021, the FDA gave the company the go-ahead to market its very low nicotine (VLN) cigarettes for the express purpose of cutting down on daily consumption for people who are trying to quit. With 95% less nicotine than a standard cigarette, 22nd Century's product is already compliant with the proposed cap.

So when the legacy cigarette businesses are scrambling to adapt their products and spending a lot of money, the biotech could be selling its cartons hand-over-fist. It effectively has a massive lead in a race to a soon-to-be-massive new market that competitors haven't even started gearing up to approach. Per management, the total addressable market could be as large as $717 billion annually, assuming that the entire global market for cigarettes is addressable with a low-nicotine entry.

The regulatory gift hasn't started giving yet

Sales of 22nd Century's VLN products are just starting, and its trailing 12-month revenue is only around $33.2 million. And since the proposed rule won't even be subject to debate until 2023, it likely won't be endorsed and implemented to be binding until around 2027, if it ever is. In the short term, the company is rolling out sales in several pilot locations before attempting to scale up nationwide, so it might be a while before its revenue growth picks up.

Still, 22nd Century is a biotech, not a dedicated manufacturer and distributor of cigarettes like its larger competitors. Thanks to the proposed regulations, though, it won't ever need to be a global cigarette seller for it to grow a tremendous amount. Management is already broaching the topic of licensing out its reduced-nicotine cultivars of tobacco and its nicotine-reducing technologies to businesses that need help complying with the proposed regulations.

If competitors bite and pay for the licenses, it'll mean taking a (potentially quite large) slice of their revenue without needing to go through the trouble of building a commercial organization at the same scale as its large competitors, nevermind actually growing or processing the tobacco. And when it comes to gifts from regulators, there's not much that's sweeter than the prospect of getting paid to help competitors modify their products to be more like yours.