3 Things You Really Need to Know About 22nd Century Group

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Few stocks have generated as much excitement in 2017 as 22nd Century Group (NYSEMKT: XXII). Shares of the plant biotechnology company nearly tripled in price by mid-September. While some of those gains were given up, 22nd Century Group stock is still up more than 150% year to date.

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But why has this small-cap stock captured investors' attention? And what are the prospects for the company? Here are three things you really need to know about 22nd Century Group.

1. Its products could be really disruptive

Everyone by now knows the harmful effects of smoking cigarettes. Health warnings have been printed on packs of cigarettes for more than 50 years. However, an estimated 36.5 million Americans still smoke, and roughly 480,000 individuals still die each year from diseases caused by cigarette smoking.

Enter 22nd Century Group. The company uses proprietary genetic engineering to control how much nicotine is produced in tobacco plants. 22nd Century Group says that it can grow tobacco with up to 97% less nicotine than regular tobacco. 

Shares jumped earlier this month when 22nd Century Group announced preliminary results from a late-stage clinical study evaluating potential approaches to lowering the addiction potential of cigarettes. The study wasn't conducted by 22nd Century Group, and the results are still under peer review, but the news was exactly what the company wanted to hear. An immediate reduction of nicotine (using 22nd Century Group's very-low-nicotine cigarettes) proved to be the best approach for smokers.

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Many Americans try to kick the habit of cigarette smoking but are unsuccessful because of their addiction to nicotine. 22nd Century Group thinks that its products could provide the solution. 

2. Uncle Sam could give the company a big boost

The U.S. Food and Drug Administration (FDA) stunned observers this summer by announcing plans to lower nicotine levels in cigarettes to non-addictive levels. Other countries are looking at similar approaches, including Canada, Finland, Ireland, Malaysia, and New Zealand.

While this news caused tobacco stocks to tumble, it was a great development for 22nd Century Group stock. The company claims that it alone is capable of growing tobacco with non-addictive levels of nicotine. 

You might think 22nd Century Group could find itself courted by plenty of tobacco companies in light of the FDA's plans. The company says that's exactly what is happening. On Sept. 25, 22nd Century Group announced that a license agreement with British American Tobacco (NYSE: BTI) had ended, allowing the company to "pursue much more lucrative strategic partnerships." The company said that it is now talking with other tobacco and pharmaceutical companies that "have expressed strong interest in a business relationship" with 22nd Century Group.  

3. It's still a speculative play 

With the U.S. government taking steps to dramatically reduce nicotine levels in cigarettes, and with 22nd Century Group managing a seeming monopoly on growing tobacco with very low nicotine, is buying the stock a no-brainer? Not so fast. Despite the tremendous potential, 22nd Century Group remains a speculative play.

For one thing, the FDA's plans haven't become a reality yet. It seems likely that the tobacco industry could lobby hard against the proposed changes and potentially even fight the FDA in court. Also, the regulatory changes only apply to combustible cigarettes. Most big tobacco companies have e-cigarette products that are not combustible. Tobacco giant Philip Morris (NYSE: PM) also has a "heat-not-burn" product called iQOS.

On the other hand, the FDA seems adamant about its strategy based on Commissioner Scott Gottlieb's comments. There's no guarantee the tobacco industry would be successful in fighting the proposed changes. Also, Philip Morris CEO Andre Calantzopoulos actually supports the FDA's approach and doesn't think the industry should oppose it.

22nd Century Group's market cap stands below $300 million, even after the huge gains this year. If the company lands a big deal with a tobacco company that's afraid of the FDA's actions, the stock could go much higher. However, that's still an "if" for now.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.