The Food & Drug Administration (FDA) is busy these days. Even though a recent decision could effectively entrust the electronic cigarette market to British American Tobacco (RTC 3.34%) by banning its main rival Juul Labs from store shelves, it has also taken another major step that could highlight a small, largely unknown tobacco stockpile.
The FDA has announced that it will issue a new rule next year to eliminate virtually all nicotine from cigarettes sold in the United States. If approved, it could catapult a small tobacco company. 22nd Century Band (XXII -5.84%) at the top of the cigarette industry because it already produces tobacco that contains up to 95% less nicotine than the tobacco used in conventional cigarettes.
Shares of 22nd Century have jumped nearly 60% since the plan was announced, and it could be the company cigarette makers are turning to to comply with new regulations. It may be years before anything is decided, but the grower of low nicotine tobacco will be one to watch.
Disrupting the tobacco industry
Mandating smoking very low nicotine cigarettes (VLNCs) has been on the FDA’s radar for years, and its announcement referenced a 2018 paper published by the agency in the New England Journal of Medicine claiming that 33 million people could be prevented from becoming smokers by adopting this rule.
The agency needs to make a run like this to crush the tobacco companies because according to federal law the FDA is not allowed to ban cigarettes outright. It remains to be seen how far he can go down the line.
Under the Family Smoking Prevention and Tobacco Control Act, which gave the agency authority to regulate tobacco, the FDA is prevented from banning cigarettes, implementing technically unattainable standards, or reducing the nicotine at levels that would effectively render them zero.
This proposal will, no doubt, be legally challenged by the tobacco giants. Altria (MO 2.09%) and British American – and that’s why it will be a long time before a rule comes into effect. But 22nd Century could still benefit from the process.
A safer cigarette
The tobacco company, which markets itself as an agricultural biotechnology company, naturally came out in favor of the proposal and notes that it already sells the first and only cigarette that has been reduced in nicotine content by 95%. It has received the FDA seal of approval to carry a Modified Risk Tobacco Product (MRTP) designation, and 22nd Century is required to include a “Helps You Smoke Less” label on the packaging, which could give it a competitive advantage.
VLNC cigarettes are only available in the Chicago area as the 22nd century drives their sale, but early results suggest the demand is there and a nationwide rollout could become a reality. Its VLN brand is approved for sale in nine states and it has applied for approval in all the others. It was also launched in South Korea in March.
First-quarter revenue was $9 million, up 33% from a year ago, primarily from the search market where most of its cigarettes are sold, but losses rose 84% to $9.3 million.
Although 22nd Century is increasing its production capacity by 25% with a new 62,000 square foot facility, the question remains whether it can scale enough to meet market needs. As of May 5, it had produced only some 33 million VLNC cigarettes, mostly for research, while Altria shipped some 20.6 billion cigarettes for the period.
One to watch
The real opportunity could be in the partnerships that 22nd Century could sign with the tobacco giants. If Altria or British American need to quickly develop their own VLNC cigarettes, agricultural biotechnology could be where they turn. British American previously partnered with 22nd Century to produce a low-nicotine cigarette, but eventually ended the relationship in 2017, which some say meant it was not a viable product on a large scale.
The FDA is expected to publish a proposed rule in May 2023, after which it would invite public comment. Big Tobacco will almost certainly sue to prevent the reduction of nicotine to near zero, arguing in part that the agency went beyond its legal jurisdiction, but also because, as Altria charges, the levels the FDA discussed are not technically feasible and not supported. by science. Additionally, Big Tobacco could argue that it would create a black market in traditional cigarettes with all the attendant problems.
However, the mere discussion will draw more attention to 22nd Century Group, and investors should at least keep an eye on what could become a major player in the tobacco industry overnight.