Will this $700 Billion Industry go up in Smoke?
Are you or a loved one afflicted with addiction to nicotine?
One innovative company can change your entire world…
And your portfolio.
Do we have your attention?
22nd Century Group Inc. (NYSE MKT: XXII) is a plant biotechnology company focused on tobacco harm reduction and smoking cessation products produced from modifying the nicotine content in tobacco plants through genetic engineering and plant breeding. The Company’s mission is to reduce the harm caused by smoking. 22nd Century owns or exclusively controls 128 issued patents and 52 pending patent applications in 96 countries. The Company’s strong IP position led to a licensing agreement with British American Tobacco, the world’s second largest tobacco company.
|At A Glance:|
|52 Week Range ($0.65-$3.35)|
|Average Volume (3m) 562,371|
|Shares Out (mil) 70.62|
|Market Cap $58.26M|
|Price Target $9.00|
|Cash Per Share $0.21|
XXII’s proprietary genetic engineering technology and plant breeding expertise allow 22nd Century Group to control the level of nicotine in the tobacco plant. Utilizing this unique and disruptive technology, they are able to produce tobacco with up to 97% less nicotine than conventional tobacco –in addition to plants with relatively high nicotine levels.
The possibilities are endless. In independent clinical studies, very low nicotine (VLN) tobacco has proven significant usefulness as a smoking cessation aid. For smokers who do not wish to quit, but are concerned with their health, a high nicotine tobacco cigarette has been created with what is believed to be the world’s lowest tar-to-nicotine ratio. The company feels the tobacco industry is at the start of a paradigm shift toward the development and commercialization of reduced-risk tobacco products. This may very well present a noteworthy step toward attaining the public health objective of harm reduction.
Harm reduction is a set of practical strategies and ideas aimed at reducing negative consequences associated with drug use.
The technology has created and will continue to develop a pipeline of products. The company is focusing on:
- International licensing of 22nd Century Ltd’s technology, proprietary tobaccos, and trademarks
- Research and development of potentially reduced-risk or modified risk tobacco products
- Development of X-22, a prescription-based smoking cessation aid consisting of very low nicotine cigarettes
- Manufacture, marketing and international distribution of RED SUN and MAGIC proprietary cigarettes
- Production of SPECTRUM research cigarettes for the National Institute of Drug Abuse (NIDA)
- Contract manufacturing of other companies’ branded tobacco products
In the US, there are over 280 REDSUN retail outlets listed on the company’s website but that only captures a subset of the total retailers selling the product. At the middle of May there were 170 stores listed on the company’s website. The goal was 500 stores by the end of the Q2. More will come as the year progresses and distributors expand into existing markets. Beginning June 1st, Rich & Rhine, a Portland-based distributor, doubled RED SUN’s retail base, adding 200 independently owned retail stores. 22nd Century Group has deployed about a dozen “brand ambassadors” in key markets focusing on about 340 events during the remainder of the year to increase consumer awareness of the product.
At launch the company had pre-orders from 900 stores in Spain for MAGIC. Currently there are orders from 1,100 outlets and expectations of 2,500 by year-end. Late in in May the company launched MAGIC 0.0 in the UK. By year-end, 22nd Century Group also hopes to have MAGIC available in four more countries including Belgium, Italy and France. Sales have been made to distributors but the real success of the product depends on end-user demand. Early indications probably should be available by the end of Q3.
It’s believed 22nd Century is likely to exceed its $1.5 million revenue guidance for Q2 as well as the $5 million it has guided for the year. Since early May the company has added distribution in the US, expanded the number of retail outlets it is serving, received approval to distribute in all 50 states and the District of Columbia, has been granted both a Cigarette Stamping Agent license and a Wholesale Cigarette Dealer license in the important New York state market, initiated a brand ambassador program to drive acceptance at the end-user level, launched MAGIC in the UK, and bolstered the balance sheet with a $6 million offering. At the end of Q1, the company had $3.8 Million in cash and was set to receive another $1 Million through August in settlement of a legal dispute. This is in addition to a $6 million offering recently completed.
Revenues are expected to grow from initial product sales of the company’s proprietary RED SUN and MAGIC brands. Over the longer-term, 22nd Century will enter the $1 billion US smoking-cessation market with its proprietary X-22 very low nicotine cigarettes which are currently going through the FDA approval process as a prescription smoking cessation aid The value of this technology was validated by British American Tobacco in October of 2013 when it signed a worldwide research license agreement with 22nd Century. The company received a $7 million payment in Q4 of 2013. BAT has the option to turn this research license into a royalty-bearing commercial license at any time.
XXII shares were recently assigned a $9.00 price target by Chardan Securities, which if met, would present a 1,090% move from the closing price of $0.825 on July 10. This valuation was calculated by a sum-of-the-parts perspective. The projected BAT license revenue is being discounted at 10%, and in the low case assuming the license terminates in 2028, while in the high case, assuming the license will be extended by an additional 15 years.
Assessing the commercial products, it is believed RED SUN and MAGIC can achieve $150 to $200 million in sales by 2023. EV/Sales valuation ranges are comparable to the 3.6x to 5.2x EV/Sales multiples awarded to Altria, British American Tobacco, Lorillard, Reynolds American and Philip Morris International.
The modified risk/X-22 valuation of $2 to $4 per share is calculated in numerous ways. E-cigarette makers, Victory Electronic Cigarettes and Vapor Corp., have enterprise values of $499 million and $141 million respectively. This equates to $2.42 per share using the lower EV as a bogey. X-22 valuation using a modest market share of the smoking cessation market and EV/Sales of 2x to 3x also yields per share valuation to 22nd Century Group of over $2 per share. These assumptions have been heavily discounted due to the longer-term nature of development of these lines of business, as well as the additional capital required for them.
From a historical view we have horizontal trendlines giving us a solid perspective.
Looking back two years, XXII is currently trading off a long term battle tested support level, as evidenced by the Yellow Horizontal Line.
Trades off a long term level of support offer a great entry price, and an easy safety Stop.
Any entry at current prices is a great starting price with a stop of about 10c below the support. We would give room to about $0.70.
With any catalyst or substantial news release, the first level of significant overhead resistance is clearly at the $1.50 level, as evidenced by the Green Horizontal Line.
Having defined entries and exits going into a trade such as this offers us a highly favorable risk/reward setup.
Disclosure: Our partner TFST Publishing LLC and MicrocapResearch.com received $20,000 from 22nd Century Group, Inc. as part of the company’s investor relations program.