A recent article in the New York Times pointed me to 22nd Century Group (OTCBB: XXII). After reading it and doing some of my own research, I'm convinced that the firm's “very low nicotine” tobacco represents disruptive technology that could transform the $80 billion US tobacco market as well as the $1 billion smoking cessation industry.
I recently interviewed the management team at 22nd Century Group (OTCBB: XXII) and my take away is that I’m very intrigued because of the multi-billion dollar opportunities and a key near term catalyst for the stock which should play out this week. Factor in that both GlaxoSmithKline (NYSE: GSK ) and Novartis (NYSE: NVS) signed $500million+ licensing deals in the not too distant past for nicotine addiction treatments /vaccines and the XXII story gets really interesting.
XXII is a plant biotechnology company that has developed a number of proprietary tobaccos using plant biotechnology to modify (decrease or increase) the nicotine content in tobacco plants through genetic engineering. This proprietary technology allows tobacco to grow and be processed as conventional tobacco without changing the other leaf compounds that are important to a cigarette’s taste and aroma. The company’s flagship “very low nicotine” (VLN) tobacco has the world’s lowest nicotine content: 97% less nicotine than the tobacco in leading “light” cigarette brands. On the IP front, 22nd Century owns or exclusively controls 99 issued patents in 79 countries where at least 75% of the world’s smokers reside.
Why should consumers want cigarettes with modified nicotine content? What can be done to commercialize the technology?
In short, modifying the nicotine content of cigarettes facilitates two game-changing product lines:
- VLN cigarettes as a prescription smoking cessation aid. The company’s X-22 smoking cessation aid in development is quite possibly the most effective – and most consumer-acceptable smoking cessation product in the world. Phase II-B Clinical Trial results due out in this week and could be a big catalyst for the stock.
- “Safer” cigarettes. The company’s patented tobacco has been incorporated into two 22nd Century “safer” cigarette brands that reduce smokers’ exposure to whole tobacco smoke and will appeal to a large segment of the U.S. market. (According to a JP Morgan Equity Research proprietary survey of 600 smokers, 90% of U.S. smokers report that they would switch brands if a safer cigarette were available.)
The world’s most effective smoking cessation aid – paradoxically in the form of a cigarette.
Applying its VLN technology to a product designed to meet the needs of the 25 million Americans who attempt to quit smoking each year, 22nd Century has developed X-22. Comprised of a kit of VLN cigarettes, X-22 is the holy grail of the smoking cessation industry: it is a tobacco cigarette that greatly facilitates quitting. To smokers, it is far preferable to quit smoking – with a VLN cigarette – rather than taking their chances with nicotine patches, gums or lozenges, or with other drugs that have serious side effects.
X-22 has the lowest nicotine content of any cigarette in the world; 97% less nicotine than Marlboro® Gold, formerly known as Marlboro® Lights. Further, X-22, which is patented in more than 70 countries, is the current subject of a Phase II-B clinical trial with 234 participants, making it the largest study of its kind ever conducted. Primary endpoint results of the double-blind, active-controlled, multi-center smoking cessation study, 4 straight weeks of not smoking (chemically verified), will be released by the company in mid-December 2011. Quit rates of subjects using X-22 cigarettes will be compared to quit rates of those subjects using active control cigarettes, which have conventional nicotine content. Two and three-month follow-up quit rates (from the end of treatment) will also be evaluated. The company expects results to show that X-22 is the most effective smoking cessation aid in the world. This belief is supported by the results of previous independent VLN clinical trials.
For example, one of the world’s top smoking cessation experts demonstrated remarkable results for VLN cigarettes in smoking cessation. In 2010, the Journal of Addiction published results (Hatsukami, et al 2010) of a groundbreaking University of Minnesota Masonic Cancer Center 3-arm Phase II clinical trial with 165 participants. Point-prevalence abstinence at 6 weeks after the end of treatment was 47% for the group using the VLN cigarette (containing 22nd Century’s patented tobacco with 97% less nicotine), 37% for the nicotine lozenge (4 mg) group and 23% for the low nicotine cigarette group (p=.0357). Furthermore, the VLN cigarette was associated with greater relief of withdrawal from usual brand cigarettes than the nicotine lozenge. Dr. Dorothy K. Hatsukami, the principal investigator of the University of Minnesota study, is widely considered one of the world’s top smoking cessation experts. She is one of nine voting members on the FDA’s Tobacco Product Scientific Advisory Committee, known as TPSAC, created under the Tobacco Control Act. Dr. Hatsukami has over 50 peer-review published papers to her credit on smoking cessation and tobacco harm reduction.
How does X-22 work?
X-22 (over the 6-week treatment period) satisfies smokers’ cravings for cigarettes while (i) greatly reducing nicotine exposure and nicotine dependence, and (i) separating the act of smoking from the rapid delivery of nicotine. X-22 is the only smoking cessation product that thoroughly addresses the behavioral aspects of smoking. Furthermore, X-22 is more attractive to smokers than other therapies since it smokes and tastes like a typical cigarette, involves the same smoking behavior, and does not expose the smoker to any new drugs or new side effects.
Smokers have limited pharmacological choices for quitting, all of which do not address the behavioral aspects of smoking: (i) nicotine in different forms (gums, patches, nasal sprays, inhalers and lozenges) otherwise known as nicotine replacement therapy (NRT), (ii) Chantix® and (iii) Zyban®. Approximately 50% of US smokers have already failed to quit with NRT and some users become addicted to NRT products. Both Chantix® and Zyban® were required by the FDA in July, 2009 to add “black boxed warnings” to their package inserts, which is the most serious type of warning in prescription drug labeling. These warnings highlight that serious neuropsychiatric events, including but not limited to depression, suicidal ideation, suicide attempt and completed suicide, have been reported in patients taking Chantix® and Zyban®.
Despite these serious safety issues, worldwide sales of Chantix® in 2009 and 2010 were $700 million and $755 million, respectively. In the second quarter of 2011, worldwide Chantix® sales were $190 million, including $86 million in the US. Chantix® remains the worldwide and US smoking cessation market leader. Before various safety issues arose in 2008, Chantix® was well on its way to become the billion dollar blockbuster predicted by Pfizer (NYSE:PFE). US sales of Chantix® in 2007 were $701 million, plus $182 million international sales (trademarked as Champix outside the US). According to Credit Suisse First Boston, in 2007 Chantix® was Pfizer’s fastest-growing prescription drug since Viagra®.
It would seem that the vast majority of smokers who consider using Chantix® are concerned about the drug’s serious side effects. Clearly there is a huge unmet medical need on a global scale for an effective, non-addictive, user-friendly smoking cessation product—without serious side effects.
Modified Risk Tobacco Products, i.e. “Safer Cigarettes”
In June 2010, the FDA banned the labeling or marketing of “light,” “ultra-light,” and “low tar” cigarettes to counter the implied health claims associated with these products. In place of these hugely popularly product categories, as of April 2012, the FDA will regulate a new category of products: Modified Risk Cigarettes. This new product category represents a paradigm shift for the tobacco industry and creates a massive opportunity for 22nd Century in terms of marketing its own brands, as well as for licensing the company’s proprietary technology to larger competitors.
Previously the “light,” “ultra-light,” and “low tar” categories represented approximately 80% of the $80 billion U.S. cigarette market. What’s more, 90% of U.S. smokers report a willingness to switch to a safer cigarette. Big Tobacco sales and profits are directly dependent on this huge segment of the market and 22nd Century boasts reams of scientific data that suggest the company possesses two products that will likely qualify as Modified Risk Cigarettes. Because 22nd Century’s cigarettes reduce exposure to whole tobacco smoke – not just limited smoke toxins – the company expects that its Brands “A” and “B” will become the first to be authorized by the FDA as Modified Risk Products.
Brand A: A safer cigarette with the world’s lowest nicotine content
Compared to other commercial tobacco cigarettes, Brand A has the lowest nicotine content. The tobacco in Brand A contains approximately 97% less nicotine than tobacco in leading ‘‘light’’ cigarette brands. Independent clinical studies have demonstrated that smokers who smoke VLN cigarettes containing the Company’s proprietary tobacco smoke fewer cigarettes per day resulting in significant reductions in smoke exposure, including tar, nicotine and carbon monoxide. (See chart provided by the company below.)
22nd Century believes smokers who desire to smoke fewer cigarettes per day – while also satisfying cravings and reducing exposure to nicotine – will favor overwhelmingly Brand A.
With the passing of the 2009 Tobacco Control Act, the FDA has complete regulatory authority over all tobacco products; meaning that the agency could mandate an extremely low level of nicotine in cigarettes if it deems it a benefit to public health.
In a June 16, 2010 press release, former FDA Commissioner, Dr. David Kessler recommended, “The FDA should quickly move to reduce nicotine levels in cigarettes to non-addictive levels. If we reduce the level of the stimulus, we reduce the craving. It is the ultimate harm reduction strategy.”
Harvard Professor of Public Health and former member of the FDA Tobacco Products Scientific Advisory Committee Dr. Gregory Connolly has also publicly called for the FDA to mandate a massive reduction of nicotine levels in cigarettes – to approximately 0.3 milligrams per cigarette. At present, 22nd Century is the only company in the world capable of manufacturing tobacco cigarettes with less than 1 milligram of nicotine. If the FDA does ultimately mandate such extremely low levels of nicotine content in cigarettes sold in the U.S., micro-cap 22nd Century will have a field day licensing Big Tobacco the VLN technology.
Brand B: A safer cigarette with the world’s lowest tar to nicotine ratio
Compared to other commercial tobacco cigarettes, Brand B’s smoke contains the lowest amount of “tar” per milligram of nicotine. (See graph provided by the company below.) Brand B allows the smoker to achieve a satisfactory amount of nicotine per cigarette while inhaling less tar and less carbon monoxide. For example, the smoke from Brand B has 47% less tar per milligram of nicotine compared to the smoke from Marlboro Light®. 22nd Century believes smokers who desire to reduce total smoke exposure – but are less concerned about nicotine – will find Brand B very attractive.
$500MM+ licensing deals signed by GSK and Novartis for vaccines to treat nicotine addiction
Two years ago in November, 2009, GlaxoSmithKline paid Nabi Biopharmaceuticals (Nasdaq:NABI) an upfront non-refundable fee of $40 million and agreed to further compensate Nabi an additional $500 million+ in option fees and development and sales milestones for their nicotine addiction vaccine that was in Phase III clinical trials. In 2007, Novartis paid Cytos Biotechnology a $35 million upfront payment with up to $600 million in milestone payments for an exclusive global commercial license agreement to develop, manufacture and commercialize a therapeutic vaccine in Phase II clinical development for the treatment of nicotine addiction. XXII’s Phase II-B clinical trial just ended and the company expects to release the results over the next week or two. Positive results could spark intense interest on the part of many players who value a truly successful smoking cessation aid. What these past deals suggest is that X-22 may command substantial 8-figure licensing fees in the very near future. With strong Phase II-B clinical trial results, X-22 will be the only smoking cessation aid in development –anywhere in the world-headed for Phase III clinical trials. When one compares Nabi’s market cap at the time they secured GSK’s investment to XXII’s market cap of less than $30 million it is not unreasonable to argue that XXII’s market cap is worth well north of $100 million post phase II-B as they head into Phase III.
XXII delivers Proprietary Research Cigarettes to U.S. Government
Further validation of the company’s products and technology is the fact that it has shipped more than 9 million of its SPECTRUM research cigarettes (450,000 packs) in the third quarter 2011 to The National Institute on Drug Abuse (“NIDA”), a component of the National Institutes of Health (“NIH”). As the only company in the world able to produce very low nicotine (VLN) tobacco products, XXII was chosen to supply its proprietary SPECTRUM research cigarettes as a subcontractor under a 5-year federal government contract. The SPECTRUM product line essentially consists of a series of cigarette styles that have a fixed “tar” yield but varying nicotine yields over a 35-fold range—from very low to high. Altogether, SPECTRUM features 24 styles, in both regular and menthol versions, with 8 levels of nicotine in its tobacco. By far, the most prevalent style of SPECTRUM produced for researchers is the VLN version, which has 97% less nicotine than conventional “light” cigarettes. Dozens of research studies will be conducted with SPECTRUM. The research will include: (i) smoking cessation studies, (ii) exposure studies comparing how different nicotine levels in cigarettes affect smoking behavior and exposure to smoke toxins, and (iii) studies to determine whether there is a threshold nicotine level in cigarettes which does not produce dependence.
Super-Premium Commercial Brands
22nd Century subsidiary, Goodrich Tobacco Company, has introduced two super-premium priced cigarette brands, RED SUN and MAGIC, into the U.S. market in 2011. The company plans to have these brands widely distributed in specialty tobacco channels such as tobacconists, smoke shops and tobacco outlets in 2012. 22nd Century president, Henry Sicignano III, served as Vice President and Marketing Director of Santa Fe Natural Tobacco Company, a specialty tobacco company that manufactures the Natural American Spirit® cigarette brand, prior to the sale of that company to R.J. Reynolds Tobacco Company in 2002 for $356 million. Credited with boosting American Spirit’s sales by more than 400%, Sicignano is highly capable of cracking the super-premium cigarette market with 22nd Century’s brands.
At the moment, however, this innovative microcap remains largely unnoticed by Wall Street. Besides, Elemer Piros, Ph.D., Rodman & Renshaw analyst who covers 22nd Century (with a 12-month price target of $5.00 for the now $1 stock), very few have given XXII much notice. For precisely this reason, 22nd Century is worth a careful look now. Keep in mind the following:
• Three independent Phase II trials have already demonstrated efficacy of very low nicotine cigarettes for smoking cessation. If the company-sponsored Phase II-B clinical trials that are now underway simply replicate the results of the Hatsukami study, X-22 will be seen as perhaps the most effective smoking cessation aid in the world;
• No other tobacco or pharmaceutical company in the world can produce tobacco cigarettes at the levels of 22nd Century’s VLN tobacco. If the FDA mandates drastically lower nicotine levels in commercial cigarettes – or if 22nd Century is authorized to market its cigarettes as “Modified Risk” – the company will have massive licensing opportunities domestically and world-wide;
• XXII is already generating revenue. Operating losses are minimal. Based on 22nd Century’s reported revenue for the nine months ended September 30, 2011 totaling $1.02 million, including net sales of $802 thousand, and de minimis Q3 quarter net loss of only $.02/share, the company is well on its way to commercializing its high margin products.
Late this week, investors in XXII can look forward to seeing results in the company’s Phase II-B clinical trial which should be followed by the likely filing for fast track status for their X-22 prescription smoking aid with the FDA. In 2012, the company expects to continue its sales of SPECTRUM government research cigarettes, begin marketing “Nicotine-Free” and “High Nicotine/Low Tar” safer cigarettes internationally, and will expand distribution of its super-premium RED SUN cigarettes in the U.S. Each of these initiatives represents substantial sales potential.
At today’s market cap of just $28 million, there is plenty of headroom for this undiscovered stock to run. This appears to be a safe horse to bet on ahead of key clinical trial results and beyond given the interest in the company from the entire industry.