Biotechnology firm opens up new opportunities for the multi-billion dollar market
October 31, 2014: As the biotech firm 22nd Century Group, Inc. (NYSE MKT: XXII) rang the closing bell on the New York Stock Exchange last Thursday, the multi-billion dollar tobacco industry is at the threshold of this firm’s biotechnological efforts as it went public.
The company has developed a technology based on genetic engineering and plant breeding techniques that they say can control the tobacco plant’s nicotine and nicotinic alkaloid levels. This allows them to grow the plant and reorient its addictive nicotine components without interfering with the taste that smokers are familiar with.
Biotechnology and cigarette smoking
With biotechnology, the company increased the nicotine level in the tobacco plant that aided them in developing “Red Sun” as a premium brand. It targets “upscale educated smokers” who are looking for a more highly differentiated, super premium brand. The premium cigarette sells at 10 to 15 percent premium than Marlboro and is top billed as the “Best Cigarette Ever Made”.
The company also developed other product offerings intended for the health-conscious populace that have developed a particular liking for cigarettes but do not want the negative effects that goes with it or plan to kick off the habit over time.
Its cessation aid product, called X-22, claims to reduce nicotine dependence among smokers. They say X-22 smells, smokes and tastes like the conventional cigarette, although it contains very low nicotine. It is currently under evaluation by the Food and Drug Administration (FDA). Congress has given FDA the authority to reduce nicotine in cigarettes to almost zero. Thus, X-22 should have an advantage should it pass the FDA evaluation.
Its Brand A-coded product claims to have very low nicotine content. It is undergoing modified risk evaluation at FDA so it can be marketed in the country.
Its Brand B-coded product is said to have a tar to nicotine ratio of 6:1, which is lower than the average cigarette ratio of 13:1. This means that a smoker would inhale only 50 percent of the smoke present in an average cigarette. If this is approved by the FDA, this could be welcome news to the people who are at the receiving end of second-hand smoke which causes a variety of diseases.
These three products represent for the firm $1 billion opportunities of the target market segment they are aiming for, according to company press releases.
Using its technology to regulate nicotine levels in tobacco plants, the company is also working with Anandia to come up with Cannabis varieties that they said would give a more potent form of cannabinoids for use in the medical industry. Increasing potency would aid in improving production efficiency and lower costs. The Cannabis market is estimated to be worth over $30 billion in the US.
Market spread and delivery
Growing the plant and creating the products are half the challenge. Does the company have the distribution channel and mechanism to bring them to their target market?
To gain access to more wholesalers and retailers that carry only Master Settlement Agreement (MSA) brands, in September 2014 the company became a signatory to the US Tobacco Master Settlement Agreement.
They also signed a worldwide research license agreement in October 2013 granting British American Tobacco (BAT) access to their technology. BAT’s presence in 180 countries means wider market reach for their products as well.
The firm also forged a consulting agreement with Crede Capital Group to advise on how to venture into new markets in Asia and China. Crede also invested $10 million in the company.
With good execution, these collaborations can potentially secure for them a wider market and more efficient delivery of their products.
Using biotechnology, the company aims to diversify its product lines in order to cater to the booming luxury market and the growing market that puts a premium on health and wellness.
Despite the possibility of their cessation aid products luring away smokers to eventually be non-smokers, the multi-billion dollar tobacco industry might still stand to profit. If their modified risk products get the nod of approval from the FDA, these new brands — with less nicotine or less smoke — could in fact create and sustain a new market out of people seeking both the smoking experience and a healthy lifestyle.
Their plans to conquer the luxury as well as health and wellness markets through biotechnology can be viewed as a strategic move as they venture into the stock market.
According to Bloomberg, the company’s loss of $6.7 million had grown to an even bigger loss of $26.2 million by December 2013, despite increased revenues from $18.8K to $7.3 million. In the same report, it says that the company has a strong balance sheet, that it has grown its cash reserves between 2010 and 2013 to as much as $5.8 million. It also highlighted that the company as among the most efficient in managing inventories. It has only 1,042.34 days of its Cost of Goods sold tied up in inventory.
With its price closing at $2.13 on the NYSE, the 22nd Century Group is an interesting company to watch.
David Drake is an early-stage equity expert and the founder and chairman of 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.