22nd Century Group, Inc. (NYSE: XXII)


Breaking News:

FDA wants to make cigarettes less addictive by slashing nicotine in them. For the first time, the federal government is proposing cutting the nicotine level in cigarettes so they aren’t so addictive. U.S. Food and Drug Administration chief Scott Gottlieb directed the agency’s staff Friday to develop new regulations on nicotine. The FDA has had the power since 2009 to regulate nicotine levels, but so far it hasn’t done so. In response to the news, Altira Group, British American Tobacco, Imperial Brands and Vector Group lost a cumulative $21 billion in market value. Who wins? 22nd Century, whose technology enables lowering nicotine levels in combustible cigarettes to non-addictive levels, gained $27 million in market value the same day, with room to gain a lot more ground. We think the stock is worth $3.50 or higher.

Key Takeaways:

(i) New Tobacco Policy In The Making. “A renewed focus on nicotine can help us to achieve a world where cigarettes no longer addict future generations of our kids,” Gottlieb said in a speech to staff in Silver Spring, Md.

(ii) Tobacco Trends Have Been Dwindling, But More Room To Go. Tobacco use is the leading cause of preventable heart disease, cancer and death in the United States, causing more than 480,000 deaths annually. U.S. smoking rates have been falling for decades. They dropped from about 17% in 2014 to 15% in 2015 and held about steady at that level last year. However, the FDA sees more room for improvement.

(iii) Timeline could be months or years. The FDA’s regulatory plan is the start of a process that will take many months to complete. First the agency must issue an advanced notice of proposed rulemaking. Then the agency must go through a feedback process. Thereafter the agency will form the rule proposal internally with staff. Once that is complete the notice for proposed rulemaking will take place. Then there will be an implementation period. It could be awhile.

(iv) Takeout possibilities are real. We do expect that as this process continues Big Tobacco will become interested in exploring the technology controlled by 22nd Century. 22nd Century’s work on introducing lower-nicotine cigarettes as smoking cessation tools demonstrates clearly the company is at the forefront of the FDA’s strategy on tobacco regulation. How valuable could this be to big Tobacco? Very!

(v) Read a more detailed write up here – link.