Back on January 9, 2017, 22nd Century Group Inc (NYSEMKT:XXII) was trading for around $0.90 a share. The company had just taken a hit on the back of a release detailing the regulatory progress of its lead development product and markets were trading off on the news.
In response to the sell-off, we published this piece.
Our thesis was contrarian, but simple: markets had interpreted the news wrongly and that both the near term operational progress and the long term, macro headwinds (driven, as we’ll discuss shortly, by the need for regulatory change) pointed towards strength for 22nd Century Group.
Fast forward to August 7, 2017, and the company went for just shy of $3.20 a piece. That’s a more than 255% gain across the period in question and a real winner for any of our readers that took a position based on our thesis for the stock.
So what’s been driving the action and – just as importantly – what’s next?
For those new to the company, 22nd Century Group is a biosciences company that has developed a technology that allows it to genetically engineer the tobacco plant. Using this technology, it’s able to grow strains of tobacco that share qualities consistently from one another. Specifically, the company has used the tech to create tobacco plants that have an incredibly low nicotine content – less than 0.05 mg nicotine yield per cigarette. This means the cigarettes it has produced from this plant (which are the ones it’s trying to get approved in the US and that we touched on briefly above) have around 95% less nicotine than current leading brands.
Why is this important?
Well, less nicotine should lead to a lower degree of addiction. Less addiction means fewer cigarettes smoked and – in turn – should lead to a healthier population. That’s the theory and there’s evidence to back it up. The WHO published a study outlining the correlation and actually used the above mentioned 0.05mg level as supportive of the data.
Despite this, however, there’s long been a side of the camp (notably, supported by big tobacco) that disagrees with the data and the effectiveness of nicotine reduction as a global healthcare improvement strategy. The doubt cast on the concept has weighed heavily on those involved and – in this instance – companies that are trying to develop products that underpin it, companies like 22nd Century Group.
All this changed, however, at the end of last month. The FDA outlined a plan (which it reported to mainstream media at the end of July) that will see it put laws into place designed to curb tobacco deaths. The concept that underpins these laws? A reduction in the level of nicotine that cigarette makers are allowed to put in their products.
The major producers took a real hit on the news.
Philip Morris International Inc. (NYSE:PM), Altria Group Inc (NYSE:MO) and British American Tobacco PLC (ADR) (NYSE:BTI) are all down post-announcement. 22nd Century Group, on the other hand, is soaring. And we expect that this strength will continue for the foreseeable future. The company’s technology is patented and it’s the only technology of its type (right now) that can do what it does while maintaining consistency in other various inputs such as flavor.
There’s plenty of room for licensing deals with the bigger names in the space and there’s also room for a 22nd Century branded product to get to market far quicker than might be possible for some of the company’s competitors, purely because this company is a first mover in this space.
Bottom line, there’s still plenty of life in this one. Some will say shareholders were lucky that the industry has shifted in its favor. There were signs that this was going to happen in place years ago, however, and those who saw these signs are the ones that took a position in anticipation of an industry shift, not just in response to it – and that’s where the real money was made here.
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Image courtesy of Karoly Lentoy via Flickr
Disclosure: We have no position in XXII and have not been compensated for this article.