In my last article about 22nd Century Group (XXII, Financial), I highlighted why the company’s focus on tobacco should excite investors.
Since then, the stock has gained an impressive 27% in just three months and trades at $1.07 per share. For investors who may be under the impression that they missed an opportunity to benefit from the rally, they should rest easy.
22nd Century Group’s stock still has a lot more upside potential based on multiple catalysts. In my most conservative scenario, shares post a rally of more than 50% by the end of the year with minimal downside risk. I would encourage investors who aren’t familiar with the company to read my first article to get the broader details of its operations.
Multiple catalysts to drive share price higher
- Financing risk eliminated.
One of the major concerns that investors had when looking into 22nd Century Group was that it needed additional working capital once its modified risk tobacco product (MRTP) application gained approval from the FDA. Luckily the company managed to secure funding without adding more debt to its balance sheet through a direct offering to one existing institutional investor.
The deal saw 22nd Century Group raise $5 million in gross proceeds in a registered direct offering from the sale of common stock priced at 81 cents per share in a transaction that was priced without any market discount. According to CEO Henry Cicignano, this means that when you factor in the closure of the deal as well as taking into account 22nd Century Group’s internally generated cash, the company won’t have further cash needs until May 2017.
Furthermore this doesn’t take into account British American Tobacco’s (BAT, Financial) $7 million research licensing payment that is expected between now and September 2017. Once this payment is received, 22nd Century Group can put off any plans of raising capital.
- Lawsuit likely to be dropped.
Crede Capital’s lawsuit against 22nd Century Group over wrongful termination of their joint venture cast a dark cloud over the stock’s growth story and resulted in quite a bit of panic selling among shareholders. The reality of the matter is that the lawsuit is turning out to be a frivolous one.
During a court hearing on June 14 before the Southern District of New York, the judge said, “I don't think I can say on this record that the plaintiff has demonstrated a likelihood of success on the merits,” suggesting that Crede Capital’s CEO Terren Peizer presented an extremely weak case.
Fortunately, investors can rest easy since Peizer could be looking to offer a settlement for the case. However, 22nd Century Group has publicly stated that it has no plans of settling and it intends to sue Peizer and Crede Capital.
- FDA feedback expected in 2016.
22nd Century Group’s BRAND A very low nicotine (VLN) cigarettes have the lowest nicotine content compared to commercial cigarettes since they contain approximately 95% less. The company expects these cigarettes to be the first MRTP approved in the U.S. following the review of its application by the FDA.
In 2010, the regulatory agency effected a regulation prohibiting the tobacco industry from distributing and introducing in the U.S market any tobacco product whose advertising or labeling contained the descriptions "light," "mild" or "low." This created a vacuum of sorts in the market due to the fact that many smokers mistakenly held the belief that cigarettes branded with such descriptions caused fewer health problems compared to regular cigarettes.
Contrary to this popular belief research has shown that mild cigarettes do not reduce smokers' risk of developing smoking-related problems or help them kick the habit.
Once 22nd Century Group’s BRAND A cigarettes get regulatory approval, they should capture a large share of smokers looking to reduce smoking's harmful effects.
- International distribution to pick up.
Going forward, international sales are expected to start making an impact on the top line before the end of the year. During the second quarter conference call management painted an upbeat picture of the international market scene as it revealed that its European manufacturing partner would begin production of MAGIC cigarettes for France.
These cigarettes are scheduled for introduction to the market following the holiday season and will mark the first time 22nd Century Group’s VLN cigarettes are used with the new CelFx carbon metrics filter from Celanese International.
Production of MAGIC and RED SUN cigarettes in the company’s North Carolina manufacturing facility for distribution in France and Australia will also begin around September. The company has also stated it plans to relaunch its MAGIC cigarettes with the CelFX carbon filter in the regions once they sufficiently penetrate the market.
22nd Century Group also remains positive about its plans of expanding distribution into India following management’s meetings with multiple tobacco and pharmaceutical companies in the country in June. According to the World Health Organization (WHO), India is home to about 12% of the world’s smokers, and the growing interest in 22nd Century Group’s low nicotine and high nicotine varieties of tobacco leaf bodes well for the company.
- X-22 partners showing interest.
22nd Century Group believes its X-22 smoking cessation product will emerge as the world’s most effective smoking cessation aid. In order to maximize this opportunity to the fullest, the company has been actively looking for the right strategic partners for a joint venture to fund Phase 3 clinical trials. The company has brought in Jim Wale, a former Johnson & Johnson (JNJ, Financial) executive with more than a decade of experience managing sales, as its new business development manager. The company expects him to bring new insights that will prove invaluable in bringing new JV partners on board.
- More licensing opportunities with Anandia emerging.
Another important development that investors should be aware of is that several licensing opportunities with Anandia Laboratories are taking shape. Under the terms of the current sublicense with Anandia, 22nd Century Group has an exclusive sublicense in the U.S. and a co-exclusive sublicense in the remainder of the world, excluding Canada, to one U.S. patent and 20 patent applications relating to four genes in the cannabis plant that are required for the production of cannabinoids, the active ingredients in the cannabis plant, that extend to 2035.
With these additional potential licensing opportunities in play, 22nd Century Group will be better placed to further its research and development activities in Canada to create unique plant varieties of cannabis with either low or no amounts of THC for the legal hemp industry or plants with high levels of CBD and other non-THC cannabinoids for the legal medical marijuana markets.
Conclusion
While the list above doesn’t comprehensively cover all of 22nd Century Group’s catalysts, it certainly backs up the investment case for this tobacco producer. Add this to the fact that the stock’s technicals show it has already breached its 200 (MA) for the first time this year, the stock couldn’t be more appealing for long-term investors.
Furthermore, it appears that investors who had heavily shorted the stock in expectation of a down trend following the lawsuit, will now have to cover their positions. This means that we can expect to see the share price edging higher in the coming weeks.
All in all, 22nd Century Group is poised for above average returns (with 50% being overly conservative) and with a share price of about $1, the stock could easily break its 52-week high of $1.75 on the backdrop of any positive news.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
