Is there something like better tobacco?

by David Drake

Biotechnology firm opens up new opportunities for the multi-billion dollar market
As the biotech firm 22nd Century Group, Inc. (NYSE MKT: XXII) rang the closing bell on the New
York Stock Exchange last Thursday, the multi-billion dollar tobacco industry is at the threshold of
this firms biotechnological efforts as it went public. The company has developed a technology
based on genetic engineering and plant breeding techniques that they say can control the tobacco
plants nicotine and nicotinic alkaloid levels. This allows them to grow the plant and reorient its
addictive nicotine components without interfering with the taste that smokers are familiar with.

Biotechnology and cigarette smoking

With biotechnology, the company increased the nicotine level in the tobacco plant that aided them
in developing Red Sun as a premium brand. It targets upscale educated smokers who are
looking for a more highly differentiated, super premium brand. The premium cigarette sells at 10
to 15 percent premium than Marlboro and is top billed as the Best Cigarette Ever Made.

The company also developed other product offerings intended for the health-conscious populace
that have developed a particular liking for cigarettes but do not want the negative effects that goes
with it or plan to kick off the habit over time.
Its cessation aid product, called X-22, claims to reduce nicotine dependence among smokers.
They say X-22 smells, smokes and tastes like the conventional cigarette, although it contains very
low nicotine. It is currently under evaluation by the Food and Drug Administration (FDA). Congress
has given FDA the authority to reduce nicotine in cigarettes to almost zero. Thus, X-22 should
have an advantage should it pass the FDA evaluation.
Its Brand A-coded product claims to have very low nicotine content. It is undergoing modified risk
evaluation at FDA so it can be marketed in the country.
Its Brand B-coded product is said to have a tar to nicotine ratio of 6:1, which is lower than the
average cigarette ratio of 13:1. This means that a smoker would inhale only 50 percent of the
smoke present in an average cigarette. If this is approved by the FDA, this could be welcome news
to the people who are at the receiving end of second-hand smoke which causes a variety of
diseases.
These three products represent for the firm $1 billion opportunities of the target market segment
they are aiming for, according to company press releases.
Using its technology to regulate nicotine levels in tobacco plants, the company is also working with
Anandia to come up with Cannabis varieties that they said would give a more potent form of
cannabinoids for use in the medical industry. Increasing potency would aid in improving production
efficiency and lower costs. The Cannabis market is estimated to be worth over $30 billion in the
US.

Market spread and delivery

Growing the plant and creating the products are half the challenge. Does the company have the
distribution channel and mechanism to bring them to their target market?
To gain access to more wholesalers and retailers that carry only Master Settlement Agreement
(MSA) brands, in September 2014 the company became a signatory to the US Tobacco Master
Settlement Agreement.
They also signed a worldwide research license agreement in October 2013 granting British
American Tobacco (BAT) access to their technology. BATs presence in 180 countries means wider
market reach for their products as well.

The firm also forged a consulting agreement with Crede Capital Group to advise on how to venture
into new markets in Asia and China. Crede also invested $10 million in the company.
With good execution, these collaborations can potentially secure for them a wider market and
more efficient delivery of their products.

Future outlook
Using biotechnology, the company aims to diversify its product lines in order to cater to the
booming luxury market and the growing market that puts a premium on health and wellness.
Despite the possibility of their cessation aid products luring away smokers to eventually be nonsmokers, the multi-billion dollar tobacco industry might still stand to profit. If their modified risk
products get the nod of approval from the FDA, these new brands with less nicotine or less
smoke could in fact create and sustain a new market out of people seeking both the smoking
experience and a healthy lifestyle.
Their plans to conquer the luxury as well as health and wellness markets through biotechnology
can be viewed as a strategic move as they venture into the stock market.
According to Bloomberg, the companys loss of $6.7 million had grown to an even bigger loss of
$26.2 million by December 2013, despite increased revenues from $18.8K to $7.3 million. In the
same report, it says that the company has a strong balance sheet, that it has grown its cash
reserves between 2010 and 2013 to as much as $5.8 million. It also highlighted that the company
as among the most efficient in managing inventories. It has only 1,042.34 days of its Cost of
Goods sold tied up in inventory.
With its price closing at $2.13 on the NYSE, the 22nd Century Group is an interesting company to
watch.

Note: This article appeared on The SohoLoft with this linkhttp://thesoholoft.com/is-theresomething-like-better-tobacco/ on Nov 4, 2014.

Photo credit to happy-2013.blogspot.com

David Drake is an early-stage equity expert and the founder and chairman of Victoria
Global, LDJ Capital, a New York City-based family office, and The Soho Loft Media Group
The Voice of Capital Formation a global financial media company with three divisions: Corporate
Communications, Publications, and Conferences. You can reach him directly at
David@LDJCapital.com.