If You Could Invent One Thing – This Might Be It

As a kid I can remember dreaming of things that I would love to invent.  Off the top of my head I can remember wishing for a kitchen tap that flowed Coca-Cola, a magic wallet that made $100 bills appear in it and a robot that could do my homework.

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None of those big ideas panned out for me.

22nd Century Group Inc. (NYSE: XXII) has a business objective with ambitions that seem almost as outrageously large.  The company is working to make smoking safe.

Or safer at least.  The official mission statement of the company is:

“To Reduce the Harm Caused by Smoking”

The company has made some decent progress towards this ambitious (to put it mildly) goal.

Given the size of the market the company has in front of it should it be successful, success on even a modest scale would be rather rewarding for shareholders.

Companies with big aspirations like this rarely pan out.  I think this one is a little different though and worth putting on your radar.

 

Sad But True – The World Still Loves Smoking

It is ridiculous but it is true.  The global smoking market is still enormous.

Check out these statistics:

– There are 6 trillion cigarettes consumed annually

– Global cigarette sales total $610 billion

– US cigarette sales are $80 billion

– There are 1.3 billion smokers worldwide

– There are 45 million US smokers

We might as well face it, as humans we aren’t going choose to quit this crazy habit.

If however the people could continue to enjoy smoking but do it safely, wouldn’t they at least choose to do that?

That is part of what 22nd Century Group is offering.

The company’s BRAND A and BRAND B cigarettes will benefit smokers who are unable or unwilling to quit smoking and but would be interested in cigarettes which reduce exposure to nicotine or to certain tobacco smoke toxins.  This would allow them to continue to enjoy whatever it is they enjoy about smoking but have a lower health risk than conventional cigarettes create.

It seems like a no-brainer to me that most people would choose the healthier option.

According to 22nd Century, compared to commercial cigarettes, the tobacco in BRAND A has approximately 95% less nicotine than tobacco in cigarettes previously marketed as “light” cigarettes.

BRAND B’s smoke contains an extraordinarily low amount of “tar” per milligram of nicotine.

Both of these products are a work in progress.  On that front 2016 was a very positive year.

Over the course 2016, 22nd Century reported the results of six new independent clinical studies investigating the efficacy and comparative safety of Very Low Nicotine (VLN) cigarettes.

Also last year independent scientists published four compelling recommendations calling on governments worldwide to adopt VLN cigarettes as a central part of efforts to reduce smoking prevalence around the world.

The most noteworthy among the organizations endorsing our Company’s VLN cigarettes was the World Health Organization Study Group on Tobacco Product Regulation.

The World Health Organization report looked at the science behind VLN cigarettes and came to a policy recommendation that is very significant for 22nd Century.  The WHO recommended of a policy of limiting the sale of cigarettes to brands that have a nicotine content that is low enough that it doesn’t lead to the development of an addiction.

On its website 22nd Century brings forward the key point that currently “22nd Century is the only company in the world capable of producing combustible tobacco cigarettes at this very low level of nicotine – without any artificial extraction or chemical processes.”

Those are the two points that you need to take note of:

  • The WHO recommends that countries limit cigarette sales to low nicotine sales
  • 22nd Century has the intellectual property that can accomplish this

That is why I think this company is worth keeping an eye on.

 

Financial Considerations – Help With The Heavy Lifting

What is also a bit unique about 22nd Century is how much money is being spent on the company’s behalf.  Six different studies and four different recommendations that governments adopt VLN cigarettes.

22nd Century was the beneficiary of tens of millions of dollars of clinical trials that were primarily funded by the National Institute of Health (NIH) and the U.S. Food and Drug Administration (FDA).

These entities are doing the heavy lifting for 22nd Century.

A near term positive catalyst for this company could be one or more of the 180 member countries of the WHO adopting VLN tobacco as a harm reduction strategy.

I’m sure all of us who have inflated insurance premiums as the result of the medical care required for smokers would happily support this sort of decision.

Operationally 22nd Century is already past the development stage and into commercial operations.  In 2016 the company reported a 50 percent organic increase in revenues.

Despite that increase the company believes that the big prize for its technologies relates to major licensing contracts or strategic partnerships with larger partners.  In other words the long term future here is not as a manufacturer it is as the owner of the intellectual property.

That seems like a much better business model to me, one with very high margins and much lower required up-front capital expenditures.

Despite the focus not being on manufacturing 22nd Century recently indicated in the company’s 2016 year-end shareholder letter that enough contracts are already in place to ensure that 2017 gross revenue will again significantly exceed 2016.

In the near term 22nd Century will be focusing more of its resources (balance sheet has a strong net cash position) towards advancing regulatory efforts.  A key focus is the company’s Modified Risk Tobacco Application (MRTP) with the FDA for the “BRAND A” VLN cigarette.

The MRTP for BRAND A requests that 22nd Century be able to state on its packaging and in advertising that the company’s VLN cigarettes reduce exposure to nicotine since it actually does contain 95% less nicotine than conventional tobacco.

Having the FDA’s stamp of approval would obviously be a huge selling point and is a key milestone for the company.  The current status of the MRTP has 22nd Century refiling the application as the FDA has requested additional information.

Progress on this front should take place through 2017.

Risks

There is clearly potential here.  22nd Century has the intellectual properties and possibly a huge market to tap into.

There are also significant risks.  When a market is this large it will attract competition with much deeper pockets.  The easiest route for competition will be to license the technology from 22nd Century but it could also be that superior products are created by competitors.

There is also not guarantee that the FDA will grant 22nd Century’s request or that the WHO recommendations will actually result in policy change.

Please keep these risks in mind.

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