Investing in Biotechnology: New Roadmap to Impact Tobacco Market Sales?

The 22nd Century Group, Inc. (XxII) aims to bring biotechnology into the cigarette industry when it rang the closing bell in the New York Stock Exchange's NYSE MKTS Thursday, October 18. It heralded its initial listing on the NYSE and the milestones in their biotech application efforts.

The biotech firm has developed a technology using genetic engineering and plant breeding techniques that can significantly alter nicotine content in the tobacco plant to their desired level.  

A Breakthrough in Tobacco Biotechnology

This biotechnology breakthrough can drastically affect the production costs associated with growing tobacco and producing cigarettes around the globe.  

The company has developed four cigarettes based on this technology that target specific markets:

Their prescription smoking cessation aid product, called X-22, “tastes, smells and smokes like a conventional cigarette” but reduces dependence on nicotine over time, and claimed to help smokers quit altogether. Presently, it is undergoing clinical trials. This is significant competitive advantage for the company since Food and Drug Authority (FDA) may require tobacco companies to reduce levels of nicotine in cigarettes over time.

Brand A-coded product is their very low nicotine (VLN) cigarettes, which they say is lower than the commercially available light cigarette by 97 percent.

Brand B-coded product is their cigarette with low tar to nicotine ratio. It has a tar to nicotine content ratio ranging from 50 to 60 percent less than the average cigarette brand. This means only half of the original smoke is inhaled by the smokers or the people around them.  

Brands A and B are their two modified-risk products in the pipeline. They say these can capture 1.6 percent of another brand’s market share if they are approved by the FDA.

The company also developed their luxury brand cigarette called “Red Sun”. The product is being sold to the premium brand smokers market. They sell at 10 to 15 percent higher than the Marlboro brand.

The company’s technology is not only limited to altering levels of nicotine in tobacco plants. They say it can also increase certain types of cannabinoids in the Cannabis plant, making it more commercially viable as medical marijuana. The legalized US Cannabis market is estimated to be worth as much as $30 billion.

Market Supply and Expansion

To have a wider reach and distribution for its array of products, the company initiated talks and sealed agreements.  

In October 2013, the company signed a research licensing treatment with British American Tobacco (BAT), which is one of the largest multinational cigarette companies in the world. The license can be converted into a full commercial license and sublicense with revenue sharing arrangements with 22nd Century. Currently, it is finalizing with BAT to roll out tobacco and hybrid products thereby opening the floodgates to 180 markets.

It also acquired NASCO Products LLC, a federally licensed tobacco product manufacturer, so as to become a member of the US Tobacco Master Settlement Agreement (MSA). As a member, the company can expand its distribution to wholesalers and retailers that only carry MSA brands.

Last September 2014, the company entered into a consulting agreement with Crede Capital Group to advise it on how to market its very low nicotine or lower in Asia and Africa. The latter also invested 10 million dollars in the company.

Forecast

As the group rang the closing bell in the NYSE on Oct 18, biotechnology could be ushering a new era in the tobacco industry.

With the markets for expansion in place, the means for delivery planned out, and application for the FDA approval in process , the next important task the company has to hurdle: Acceptance of these products by the targeted markets and getting the ordinary citizen to invest in its company.

Will consumers show preference for these cessation aid and modified risk tobacco products over regular cigarettes?  Will all of these translate to lower market sales eventually when people reduce smoking or kick off the habit as they claim, or will it just create a new market that prefers the pleasure of cigarette smoking without the guilt?  

According to Bloomberg, the company’s losses within a 4 year period grew to $26.2 million by December 2013, despite increased revenues of $7.3 million. In the same report, it says that the company’s cash reserves reached $5.8 million in the same period.

It remains to be seen if the early stage company, 22nd Century Group, will be in this for the long haul. With its price closing at $2.13 on the NYSE, the biotech firm with its array of low nicotine product offerings in the homefront, Asia and Europe, it is an interesting company to watch.

David Drake is an early-stage equity expert and the founder and chairman of Victoria Global, LDJ Capital, a New York City-based family office, and The Soho Loft Media Group, a global financial media company with divisions in Corporate Communications, Publications and Conferences. You can reach him directly at [email protected].