What happened?
Progress in crafting marijuana plants that are high in the non-psychoactive marijuana cannabinoid cannabidiol (CBD) and tobacco that’s low in nicotine sent 22nd Century Group, Inc. (NYSEMKT:XXII) rocketing 157% higher in 2017, according to S&P Global Market Intelligence.
So what
22nd Century is a plant biotechnology company that genetically engineers and breeds tobacco and cannabis plants to make them more valuable. Its primary work includes low-nicotine tobacco plants and hemp plants that can be used in soil remediation, but it’s also working on cannabis that’s high in CBD, a cannabinoid that’s been associated with positive outcomes in epilepsy patients.a
The company’s rally last year was mostly sparked by news at the end of July that the FDA is considering a mandate that would require the use of low-nicotine tobacco in cigarettes. 22nd Century has been working closely with the federal government on projects evaluating the use of low-nicotine cigarettes, and that may give it advantages in winning contracts if the FDA follows through with its mandate.
James E. Swauger, PhD, senior vice president of science and regulatory affairs for 22nd Century Group, explained, “The Tobacco Control Act explicitly and unambiguously gives the FDA the authority to regulate nicotine levels in cigarettes. … 22nd Century stands ready to partner with the FDA and with any company that is committed to improving the health of American smokers.”
22nd Century can grow tobacco with minimally or nonaddictive levels of nicotine without using artificial extraction or chemical processes. In fact, its very low-nicotine cigarettes contain 95% less nicotine than the leading cigarette brands on the U.S. market.
Shares also got a boost last year from the company’s work with the University of Virginia on identifying hemp varieties that may help improve soil conditions in areas where mining and other environmental disasters have occurred. This process, which is called phytoremediation, has been used to reclaim land following the Chernobyl and Fukushima nuclear accidents. The company believes its fast-growing hemp varieties can absorb toxins, metals and other soil contaminants more effectively and cheaply than other options.
22nd Century is also working with UVA to create high-value medicinal cannabinoid varieties and specialized cannabinoid extraction processes for use in medicine. It’s also expanding hemp activities in New York, where legislators are supporting efforts to become a leading grower and producer of hemp and hemp products.
The potential to help remake the U.S. tobacco market undeniably offers big opportunities for 22nd Century, but investors should recognize that the company’s not generating revenue from its tobacco or hemp efforts yet and is losing money every quarter.
In the third quarter of 2017, sales were $4.5 million, up 46% year over year, but that growth came from inking a contract to produce a new filtered cigar, and the company reported a $3.3 million operating loss in the quarter, up from a $2.6 million loss the prior year.
It may be a while before the FDA acts on its low-nicotine mandate, and it’s anyone’s guess when cannabis efforts will translate into meaningful sales. Fortunately, the company did take advantage of the run-up last year to issue more shares, and that’s solidified its balance sheet. Exiting the third quarter, the company had $65 million in cash on hand, and management says that’s enough money to cover its operating expenses for at least five years. Perhaps that will be long enough for the company to benefit from its tobacco and cannabis research efforts, but that remains to be seen.
