Tobacco Industry — The Problem and the Opportunity
By: Chrissis Petrakis
Tags: Opportunity, Stocks, Tobacco, Stock Market

The quarantine days I spent in a beautiful island called Cyprus, got me to engage into new hobbies and activities and one of them was reading. Reading got me interested in investing. My investing journey commenced back in May 2020 and since then I endeavor to constantly study the Stock Market and the various industries.

In my first story here, I would like to share some thoughts regarding the Tobacco Industry that led me to believe there is both a problem and an opportunity, and room for innovative and disruptive technologies that could soon be implemented for the greater good.

𝘽𝙖𝙘𝙠𝙜𝙧𝙤𝙪𝙣𝙙 𝙄𝙣𝙛𝙤𝙧𝙢𝙖𝙩𝙞𝙤𝙣 𝒓𝒆𝒈𝒂𝒓𝒅𝒊𝒏𝒈 𝙩𝙝𝙚 𝙏𝙤𝙗𝙖𝙘𝙘𝙤 𝙄𝙣𝙙𝙪𝙨𝙩𝙧𝙮 (𝙏𝙝𝙚 𝙋𝙧𝙤𝙗𝙡𝙚𝙢 𝒂𝒏𝒅 𝑻𝒉𝒆 𝙊𝙥𝙥𝙤𝙧𝙩𝙪𝙣𝙞𝙩𝙮)

According to US Department of Health and Human Services, Cigarette smoking remains the leading cause of preventable disease, disability, and death in the United States, accounting for more than 480 thousand deaths every year. In 2019, nearly 14% of US adults aged 18 or older smoked cigarettes which means that 34 million adults in the US currently smoke cigarettes.

According to the World Health Organization, there are 1.3 billion tobacco users worldwide, and tobacco kills up to half of its users. In fact, tobacco causes 8 million deaths per year or one death every five seconds.

Around 6.5 trillion cigarettes are sold around the world each year, which translates to roughly 18 billion cigarettes per day. It is a lucrative industry and one that makes its fortunes largely off the backs of the poorest people in the world, both in terms of supply and demand.

Only by looking at the above data (which is just an indication as a lot more can be said and analysed), someone can easily understand that there is a great growth potential for Companies in the Tobacco Industry that could provide innovative and disruptive solutions.

As an Investor, although new to the game, I am constantly looking for Companies that could be the next Amazon (though a bit difficult task!).

This Group of Companies, called 22nd Century Group Inc. caught my eye.

𝙒𝙝𝙤 𝘼𝙧𝙚 𝙏𝙝𝙚𝙮

22nd Century Group was founded in 1998 and went public in 2011. It is a plant biotechnology company that develops and provides commercial solutions to the life science, consumer products, and pharmaceutical markets. They focus on technologies that alter the level of nicotine in tobacco plants and the level of cannabinoids in hemp/cannabis plants through genetic engineering, gene-editing and modern plant breeding. They aim to reduce the harm caused by smoking by reducing the level of nicotine by 95% compared to conventional cigarettes; they also aim to develop proprietary hemp/cannabis plants with valuable cannabinoid profiles and agronomic traits for commercial use.

𝙏𝙝𝙚 𝙂𝙖𝙢𝙚 𝘾𝙝𝙖𝙣𝙜𝙚𝙧

By looking into the Company’s profile, and the above background, someone can easily understand that this Company has a great potential for growth. However, and to some extent, the Company’s future is dependent on regulations.

At the moment, and for some time now, the Company is in hunt of the MRTP (Modified Risk Tobacco Products) status which would enable them to be the only Company to sell and market VLN (Very Low Nicotine) cigarettes.

According to the Company, there is an ongoing dialogue with the FDA (Food and Drug Administration) and the authorization, as required under section 911 of the Federal Food, Drug, and Cosmetic Act, is imminent. I would add that it is inevitable following the FDA’s ground-breaking Comprehensive Plan for Tobacco and Nicotine Regulation issued in 2017 that was aiming to set a product standard for cigarettes that achieves “minimally or non-addictive” levels of nicotine.

Below you can see what the Management of the Company stated during the announcement of the 3rd quarter (ending September) of 2020 Report:

“We continue to feel confident in a positive outcome for several reasons. First, the FDA continues to interact with our company regarding our application, which is often not the case with applications that are bound for rejection. More broadly, the FDA has funded and continues to fund millions of dollars of research to better understand the public health benefits of our reduced nicotine-content cigarettes. To-date, the FDA has authorized only two MRTP applications; one for a smokeless tobacco product and one for a heated tobacco product. Both of these products received their authorizations approx. 5–6 months after the closing of their public comment period. Our public comment period closed in mid-May, a little over five months ago.”

Although the Company reports some slow progress in other fields, the game changer for them at the moment, is achieving the MRTP status. The Company plans to launch VLN cigarettes within just 90 days from authorization. The company has an FDA-cleared production facility that can manufacture up to 1% of the US market, which, if needed, can be tripled with minimal capital expenditure.

𝙁𝙞𝙣𝙖𝙣𝙘𝙞𝙖𝙡𝙨 (𝑻𝒉𝒊𝒓𝒅 𝑸𝒖𝒂𝒓𝒕𝒆𝒓 𝒐𝒇 𝟐𝟎𝟐𝟎)

The Company reported for the three months ended September 2020, a Net Sales revenue of $7.3M (+13% YoY), improvement of 3.6M in operating loss YoY, improvement of $6M in net loss YoY, improvement of $1.2M in Adjusted EBITDA YoY, and improvement of $0.05M in Net loss per common share YoY. The Company also reported cash, cash equivalents, and shot-term investment securities of $26.8M and total assets of $57.4M.

𝙄𝙣𝙩𝙚𝙧𝙚𝙨𝙩𝙞𝙣𝙜 𝙁𝙖𝙘𝙩

The CEO of the Company has recently (17 November) purchased 100k of more shares at a price of $0.93 a share.

𝘾𝙤𝙣𝙘𝙡𝙪𝙨𝙞𝙤𝙣

Tobacco Industry is a lucrative industry.

Smoking kills and FDA’s authorization for VLN cigarettes is closer than ever.

This Company, 22nd Century Group, has a great growth potential. Even achieving one-quarter of 1% of the US market ($100 billion a year) could drive the Company’s market capitalization way higher (ten times is what the Company’s Management supported during the Q3 results issued on 05 November 2020 when the price was around $0.75 per share).

This is not an investment advice, just my own thoughts.

Keep Safe

CP