By Martinne Geller

LONDON (Reuters) - Investors are betting on a little-known biotech company to supply Big Tobacco with low-nicotine cigarettes, but so far its technology is unproven.

Shares in New York-based 22nd Century Group have soared 80 percent to a three-year high since late last month, when the U.S. Food and Drug Administration proposed cutting the nicotine levels in cigarettes so they aren't so addictive.

Investors' hopes are pinned on 22nd Century's technology becoming widespread, although none of the big tobacco makers has bought it yet.

The plant biotechnology company says it has more than 200 patents that give it the ability to increase or decrease the level of nicotine in tobacco plants, as well as the level of cannabinoids in cannabis plants.

"We genetically modify the tobacco. We've been working on this for 20 years," Henry Sicignano, chief executive of 22nd Century, told Reuters.

Sicignano, who helped to develop Natural American Spirit cigarettes before the brand was bought by RJ Reynolds in 2002, said the aim was to reduce the harm caused by smoking. By making cigarettes less addictive, people would smoke when they want to rather than when they need to, and would probably smoke less.

That is the logic behind the FDA announcement suggesting regulating nicotine and encouraging smokers to switch to alternatives seen as less harmful, such as e-cigarettes.

Sicignano said 22nd Century can make cigarettes with 95 to 97 percent less nicotine than conventional cigarettes, which have about 10 mg of nicotine each. It is the only company with tobacco that can be below the threshold of what health regulators say they believe to be non-addictive, he added.

A top-10 shareholder of 22nd Century said major cigarette firms would have to turn to it if the FDA's proposal becomes reality. "If Big Tobacco doesn't want their market to go to zero overnight, they're going to have to work with someone who has a low-nicotine tobacco leaf," he said.

Story continues

While the long-term market for low-nicotine cigarettes is highly uncertain, given that they are designed to be easier to quit, he said it would take years for all smokers to quit. "For a tiny company there's a huge opportunity."

22nd Century has roughly 80 employees and annual revenue of about $16 million, a portion of which is from regulators such as the FDA using its tobacco to run clinical trials. So far it has got orders for over 24 million cigarettes for this purpose, with at least 25 such trials underway.

It sells some low-nicotine cigarettes in Spain and does contract manufacturing of regular cigarettes "to keep the lights on".

British American Tobacco, the world's biggest international tobacco company, has been assessing the opportunity for tobacco with altered levels of nicotine. It has a four-year research agreement with 22nd Century worth up to $14 million that gives it the right to enter into an exclusive worldwide licensing agreement with the company.

Sicignano said he expected BAT to enter into a commercial agreement, and noted that any such deal would not prevent 22nd Century from selling its own products - finished cigarettes or tobacco leaves - to rivals such as Altria, Japan Tobacco International or Imperial Brands.

A BAT spokeswoman said the agreement was part of its research and development programme on nicotine levels. She declined to comment on whether BAT planned to exercise its licensing right.

Like many start-ups, until the deals are signed, 22nd Century is struggling to make money.

"We're not a profitable company. It's certainly important for us to be able to achieve regulatory acceptance either here or in the EU or perhaps in Asia," Sicignano said. "We're working on all these fronts, so that we can bring these important products to market and be a profitable company."

LIKELY TO FACE RESISTANCE

With retail sales of tobacco nearing $119 billion, the United States is the fourth-biggest market behind China, Indonesia and Russia. Because of relatively light federal taxes, it is the most profitable.

As such, tobacco companies are expected to fight any requirement to limit nicotine in all cigarettes vigorously.

Clive Bates, a former head of UK charity Action on Smoking and Health (ASH) who is now an advocate of e-cigarettes, is sceptical the FDA's proposal will come to pass as it would make conventional cigarettes commercially unviable.

"There will be a massive amount of resistance," he said, from tobacco farmers to manufacturers to retailers. "It's very difficult to put in a rule through a technocratic rule-making process that does something as big as that. Nobody has ever done anything remotely the size of that."

In the 1980s, Philip Morris and other companies tested ultra low-tar cigarettes, but they were not commercially successful.

22nd Century says its cigarettes are as satisfactory as traditional smokes, but there is still scepticism about how the low nicotine cigarettes would fare outside academic studies.

"My suspicion is that people would very quickly stop using any product that is denicotinised in that way," said Euromonitor analyst Shane MacGuill, adding that smokers may instead seek out smuggled cigarettes or those sold illicitly on the internet, or switch to vaping.

"Fundamentally smokers are nicotine-seekers and I think they'll disperse their consumption into other categories very quickly if they're not getting nicotine from cigarettes."

Indeed, Bates said forcing reduced nicotine levels would be like forcing distillers and brewers to make all their products without alcohol.

"There might be a residual market for it but you don't see a lot of people sitting around in bars swilling alcohol-free whisky," Bates said. "It would become a niche, probably for people who weren't that dependent in the first place."

As a comparison, beer with no or very low alcohol is only a tiny fraction of the market. However, it is growing faster than the category as a whole as brewers try to capitalise on consumers' greater health consciousness.

Sicignano agreed that his product may have long-term appeal to a niche, and that over time, the market will shrink if the FDA's proposal gains traction.

"I don't think there will be as many two-pack-a-day smokers out there. People will smoke less, and quit attempts will increase," he said.

(Reporting by Martinne Geller; editing by David Stamp)