22nd Century Group, Inc. (XXII) is one of the most interesting stocks in biotechnology right now. The company, which bills itself as a biotechnology company and is based in New York, has developed a proprietary technology that allows it to genetically alter plant strains so as to achieve various characteristics upon growth and maturity of the plants in question.
This technology forms the basis of two major opportunities for 22nd Century Group in two very different US markets, both of which could individually draw revenues that considerably outweigh the company’s current market capitalization in and around $320 million.
Here is a look at both opportunities and what I’m looking for next as relates to each.
The first opportunity is rooted in the tobacco industry.
In August, Scott Gottlieb, M.D., Commissioner of Food and Drug Administration gave this speech at White Oaks, MD. For anybody interested, the speech is well worth a look, but for those not wanting to click away, it basically outlines the FDA’s approach to reducing the cost associated with tobacco consumption in the US.
The cornerstone of this approach is rooted in the establishing of policy that sets a strict limit as to how much nicotine cigarettes in the US can contain. The idea is that, below a certain threshold, cigarettes no longer can be considered addictive. Remove the addiction element and the desire to smoke should subside.
This has long been a proposal considered by the FDA but only now, and on the back of Gottlieb’s speech, has it been confirmed that the future of the tobacco industry in the US is rooted in this approach.
So where does 22nd Century Group come into this?
The above-mentioned technology is the only technology in the world that is able to produce tobacco that contains nicotine below the threshold outlined as addictive by the FDA. The technology is fully patented and it’s already proven to be able to underpin large-scale production, with the company already producing millions of low nicotine cigarettes that form the basis of government testing of the approach in question.
The opportunity here, then, is rooted in 22nd Century Group licensing its technology to larger tobacco companies so as they are able to comply with fresh policy put in place by the FDA, without having to spend the time and money developing their own alternatives to the 22nd Century Group system.
This is why, when the Gottlieb speech hit press, the company immediately started to appreciate against a backdrop of sharp decline in the wider tobacco space in the US. During the last couple of days of July and the first couple of days of August, 22nd Century Group ran up to the tune of 80%. During the same period, Altria Group Inc (NYSE:MO) lost a little over 12% of its market capitalization. For a company the size of Altria, that’s around $15 billion wiped off practically overnight.
So what am I looking for going forward?
Key to the company’s ability to take advantage of the situation is swift action by the FDA in terms of executing on its plan to put policy in place limiting (or completely eliminating) the sale of standard level nicotine cigarettes.
It’s not going to be an overnight change – big tobacco lobbyists will no doubt have something to say about the matter – but the hard-line stance currently being taken by the FDA suggests that it’s also not going to drag out for years. Any news relating to forward steps being taken by the agency in the US, therefore, have the potential to inject some upside momentum into 22nd Century Group.
So that is the first opportunity, what’s next?
For the company’s second major market opportunity, I’m shifting from tobacco to hemp.
The total size of the US hemp market is estimated at around $580 million annually. We are talking industrial hemp here, which other than the obvious plant link, is nothing to do with medical or recreational marijuana. Instead, hemp is used industrially in things like rope fibers, clothing, bags, and more – even concrete.
Back in 1937, however, The Marijuana Tax Act regulated growth of marijuana, including hemp, and The Controlled Substances Act of 1970 built on this regulation to state that no marijuana plant could be grown (again, including hemp) containing more than 0.3% THC. This, of course, doesn’t include cannabis grown for medicinal and recreational purposes, but these latter two markets are subject to heavy regulation, whereas the industrial hemp market is (was) not.
The problem is that it’s really difficult to produce hemp strains that have THC levels below 0.3% and it’s even more difficult to do it consistently. If you do produce a batch and it doesn’t fall in line with government requirements, it’s disposed of entirely, meaning there is just too much risk for hemp farmers to take on under current regulation.
As we said with the first opportunity, where does 22nd Century Group come into this?
The company has used its proprietary technology to create a strain of hemp that contains zero THC. This allows farmers to grow crops of hemp in the confidence that the resulting plant will fall in line with government regulations and, in turn, isn’t at risk of disposal.
So what’s the opportunity here?
Well, because of the above discussed regulation, 100% of all hemp sold in the US (remember, as mentioned above, there is $580 million of it sold annually) is imported from abroad, primarily from Canada.
The amount spent on imports comes to around $300 million annually, with the retail markup accounting for the difference between the $518 million in revenues and the amount spent on imports.
If 22nd Century Group can license its technology to hemp farmers, the US could start producing hemp domestically, reducing its reliance on Canadian imports almost entirely. 22nd Century Group, as the sole provider of the technology that allows for production of a product that’s bringing in revenues of $580 million annually, stands to gain considerably from entering this market.
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