Samuel Rae | Sep 22, 2017 09:46AM ET

Back in April this year I published here at Investing.com. The focus of the piece was a somewhat under the radar plant biotechnology company called 22nd Century Group Inc (NYSE: ).

A month earlier, at a Meeting of the Society for Research on Nicotine & Tobacco, industry leaders and policymakers (scientists, public health officials and regulatory insiders from agencies like the FDA), had discussed the potential impact of a reduction in the amount of nicotine in cigarettes in the US on aggregate cigarette consumption.

The argument is that by reducing nicotine to a level below that which results in addiction in smokers (it's the nicotine that causes the addiction as opposed to any of the carcinogenic elements) you should be able to reduce the amount of cigarettes people smoke. In other words, less nicotine translates to a reduced chemical desire to consume cigarettes.

I highlighted the fact that 22nd Century Group is the only company in the world that has the technology to grow tobacco that contains nicotine below the recommended threshold for addiction (At that time, this was a bit of a punt. The US government had yet to take any formal steps towards policy implementation that would allow for these sorts of smoking cessation cigarettes to hit markets and this lack of regulatory action was one of the primary reasons that 22nd Century Group remained under the radar.

So why am I revisiting this stock now?

Fast forward just shy of four months from my initial coverage to July 28 and, specifically, to a healthcare regulation event held on that day at White Oaks, MD. At this event, FDA Commissioner Scott Gottlieb took the stage and gave this speech to an audience of policymakers, tobacco company executives, and healthcare regulatory players.

A few minutes into the event, after outlining some broad brush changes to the approach that the FDA is taking to tobacco since he was previously associated with the agency, Gottlieb said this:

"…examining the presence of nicotine in combustible cigarettes has to be part of a much broader strategy. I’ve pledged a deep commitment to taking aggressive steps to address the epidemic of addiction to opioids. I view our opportunity to confront addiction to nicotine with the same obligation. I’ll pursue efforts to reduce addiction to nicotine with the same vigor."

In this statement, then, the Commissioner of the FDA is essentially saying that he intends to take a much stronger stance on tobacco regulation and sale and – importantly – that the root of this stance is the level of nicotine that cigarette makers are allowed to include in their products.

In other words, the action from policymakers that was missing (and, by proxy, a risk factor) from my previous coverage is now in place. This very much strengthens the suggestion that 22nd Century Group could be a rewarding pick over the coming ten years, as the tobacco industry shifts to realign with fresh legislation.

And it's not just me that recognized this potential. Wider markets sold off on big tobacco almost immediately subsequent to the Gottlieb speech, with some of the biggest names in the industry losing 5-10% of market capitalization overnight. That's tens of billions of dollars of market capitalization wiped out at the suggestion that the companies that comprise this industry might need to alter their core product lines.

And while these companies were shedding billions in market capitalization, 22nd Century Group was doing the exact opposite. The company gained almost $100 million in market capitalization in the days subsequent to White Oaks event and has continued to steadily appreciate in value ever since.

That's no coincidence. It is wider markets realizing that the tobacco industry as a whole stands to lose out from any nicotine-limiting legislation and that 22nd Century Group, rooted in its proprietary technology, stands to win.

So what happens going forward?

Take a look at another Gottlieb quote from the same speech:

"While there’s still much research to be done on these products and the risks that they may pose, they may also present benefits that we must consider. FDA’s investment in regulatory science will eventually answer many of those benefit and risk questions."



To add some context to this, he's discussing the research necessary to establish the foundational research that underpins his argument for lower nicotine levels. Much of this has already been carried out (indeed, 22nd Century Group has conducted many trials in conjunction with various universities to establish the facts) but it's also ongoing and Gottlieb just stated that there's more research to do. This is a good thing for 22nd Century Group. Why? Because the company is the only one in the US that can create the tobacco necessary to conduct the confirmatory studies. This means the US government has to buy product from 22nd Century Group that it can use to conduct its trials.



That link details the purchase of 2.4 million of the company’s proprietary SPECTRUM research cigarettes by the US government back on June 1, 2017. SPECTRUM is one of the company's cigarette types that contain very low levels of nicotine, in line with the addiction threshold mentioned above, and is created using the company's proprietary grow technology.

Big tobacco is also approaching 22nd Century Group for its technology. The company has an ongoing licensing agreement with industry incumbent British American Tobacco (LON: ) (BTI) that sees the latter license 22nd Century Group's tobacco-growing technology to produce its own very low nicotine products. British American has an option to extend this agreement to 2028 and the option expires this year, setting up a potential major catalyst for 22nd century Group near term.

Finally, the company outlined its intentions earlier this year (on the back of a meeting with the FDA) to conduct a phase III study of its lead very low nicotine product, called X-22. The study is designed to prove that the product can be used as a prescribed smoking cessation aid in the US and, if successful, should underpin a registration application (and a subsequent approval) in this indication. The study is set to kick off at some point during early 2018, with the company deciding before initiation whether to finance the trial itself or to seek a partner that can help foot the bill.

So to get to the question of what to look for going forward, then, there are three distinct fronts on which I'd like to see operational advance.

The first is a continuation of the production and sale of research products to the government, primarily because the revenues from these products can be used to offset internal R&D costs.

The second is an update on the British American license deal and, potentially, other deals of its type announced. Both of these latter mentioned updates would validate the technology beyond its already solid degree of validation.

The third is the initiation and subsequent successful completion of the pivotal X-22 study, with these events likely coming between first and third quarter 2018.