Most major tobacco companies, such as Altria (MO +0.81%) and Reynolds American (RAI +0.00%), have realized that their time has come.
Indeed, smoking is a habit in terminal decline. To avoid going the way of the dinosaurs, tobacco companies have started to branch out into the 'reduced risk' section of the market.
As part of this reduced-risk offering, big tobacco is now becoming a leading producer of items like e-cigs and nicotine replacement products.
Universal (UVV +1.55%), one of the world's largest suppliers of raw tobacco to tobacco companies, is also branching out into the e-cig sector. However, the company could also be about to branch out into the biotechnology industry.
Essential to the wider industry
Universal grows and sources tobacco through a network of suppliers, farmers, and traders, and this business has kept the profits rolling in for decades. Universal is good at what it does; so good, in fact, that the company supplies all the major tobacco companies and even the state-controlled Chinese National Tobacco Company.
Nevertheless, the tobacco market is changing as consumers become increasingly aware of the negative health effects associated with smoking and start to kick the habit. As a result, Universal is being forced to change with the times.
Luckily for Universal, tobacco is still a highly desirable plant.
Tobacco is a life saver
Tobacco in its raw form as a leaf or plant has many uses, and it is still valued as a homeopathic medicine. What's more, it has recently emerged that tobacco plants could actually help cure cancer and scientists have been studying the plant's potential to assist in treating patients infected with the deadly West Nile Virus.
Specifically, within the past month or so, scientists at La Trobe University published a study about a protein found in the flowers of tobacco plants. These proteins apparently targeted human cancer cells and destroyed them in a test environment.
These test results raise many questions about tobacco's undiscovered beneficial effects, and they could mean that pharmaceutical companies will want to use Universal's experience and supply connections within the tobacco industry.
Furthermore, scientists at Arizona State University have used tobacco to produce therapeutics that have been shown to be effective against the West Nile virus. Mosquitos spread the West Nile virus, which can be a serious, life-altering, and even fatal disease; currently, there is no cure or drug treatment against it.
If you can't beat them, join them
Universal is also pursuing other non-tobacco initiatives.
One of the most disruptive technologies to emerge during the past decade is the electronic cigarette. Indeed, electronic cigarettes pose a huge threat to Universal's business model.
As the saying goes, though, if you can't beat them, join them. That's exactly what Universal has done. Universal's subsidiary Virginia Tobacco Company has joined with Avoca, one of the world's premier botanical extraction companies, to form AmeriNic.
AmeriNic's goal is to produce liquid nicotine for the electronic cigarette industry. The company is focusing on producing high-quality United States Pharmacopeia, or USP, grade liquid nicotine using fully traceable and compliant tobaccos.
This partnership is a really exciting endeavor for Universal. Expansion into electronic cigarettes opens up a huge new market for Universal which will allow the company to benefit from the global drive by all major tobacco companies to bring electronic cigarette offerings to the market. With every tobacco company trying to get into electronic cigarette production, Universal should be able to easily acquire customers.
Potential customers
With Universal developing its own high quality, liquid nicotine, the company's reputation and existing presence within the tobacco industry could be very beneficial when it comes to acquiring customers. Two potential customers are Altria and Reynolds American.
Both Reynolds and Altria are planning national roll-outs of their individual e-cig products throughout this year and months of testing in individual states. In particular, Reynolds has developed the Vuse digital-vapor cigarette, which it rolled out in Colorado; Vuse has quickly become consumers' e-cig product of choice.
What's more, the initial performance of Altria's e-cig offering, MarkTen, has exceeded expectations. Within just seven weeks, MarkTen achieved brand leadership by taking a market share of 48% within the trial market. Altria intends to leverage lessons learned from its initial roll-out when it commences national distribution during the second quarter of this year.
Foolish summary
All in all, as a tobacco company Universal's future is uncertain. However, with recent developments within the scientific community Universal's market could be about to expand.
Further, it would seem as if right now Universal is in a transition stage as the company moves from being a traditional tobacco grower and suppler toward being a high-tech tobacco company that specializes in pharmaceutical-grade tobacco products.
