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Thursday, April 14, 2016

Interview with 22nd Century CEO Highlights Catalysts for 2016

Earlier this week, I had a chance to speak with Henry Sicignano III, President & CEO of 22nd Century Group, Inc. (NYSEMKT: XXII). I wanted to get an update from the company on a key issue I believe may be holding back the shares, specifically the rollout and ramp-up of the company's MAGIC very low nicotine brand cigarettes in Europe. The success of MAGIC in Europe should serve as a proxy for the market opportunity with BRAND A in the U.S. BRAND A is a similar very low nicotine product currently under U.S. FDA review as a Modified Risk Tobacco Product (MRTP). While MAGIC does not have this "modified risk" claim in Europe, it still provides logistical experience to management and much-needed user feedback on the product ahead of the planned U.S. rollout for BRAND A.

I believe BRAND A will be the first tobacco cigarette approved in the U.S. with a modified risk claim later this year. Approximately 265 billion cigarettes were sold in the U.S. during 2015 (U.S. CDC). That equates to a retail market of roughly $75 billion. The U.S. CDC estimates that 70% of smokers attempt to quit each year, and according to research done by JP Morgan, 90% of smokers would be willing to try a new brand of cigarette if it were “safer” than their usual brand. I think BRAND A can be a tremendous product for 22nd Century Group, so let's get right into our conversation with Mr. Sicignano below!

Jason Napodano: Hi Henry, good to talk with you! Let's get right into the first question. On the company's fourth quarter 2015 earnings call, you noted MAGIC was on the market in Spain, with additional rollout into new countries planned for 2016. Can you give us any further update today?

Henry Sicignano: The effort to expand distribution of MAGIC in Europe is still underway. Our most current timetable is to have multiple additional countries launching MAGIC by the end of the 2nd quarter of this year.

JN: Let's talk about the filter issue. On the call, you noted the company has been slowed in its rollout by a bottleneck with filter supplier. Is MAGIC being supplied to Spain right now?

HS: MAGIC is currently available in Spain. There is no shortage of product, though we expect to transition inventory there soon to our more Euro-centric design.

JN: Explain that, please.

HS: Early feedback of the product by Spanish consumers was that MAGIC tasted too much like an American cigarette rather than being similar to the products to which they were accustomed in Europe. So we decided to address the issue with a change of filter. We were very fortunate when we identified a brand new specialty filter with tremendous patent protection that seems to further reduce certain toxicants in the cigarette. It also changes the taste profile of the cigarette to more closely resemble a European cigarette, so we strongly believe that this result will be a home run.

JN: And there seems to be some shortage of that filter?

HS: Not really a shortage, more of a logistical issue. The primary issue at this point is resolving the contractual issue with the filter component provider. The filter itself is made by a large, multi-national, multi-billion dollar conglomerate in the U.S. However, they use component suppliers and vendors in other parts of the world, so it's a bit complicated from a contractual standpoint., We are working through the process and our expectation is to have this completed very soon. However, there are additional challenges to overcome before the filter is available for the final manufacturing process, including the preparation of the filter for its combination with our tobacco cigarette.

JN: But you've already completed some of this work, correct?

HS: We actually have a couple of initial shipments of the filter in our factory where we have made test cigarettes. Overall, we are very pleased with the product. We believe this filter is exactly what MAGIC needs. It solves the taste issue and potentially adds some very interesting benefits of reducing certain toxicants in cigarettes. We will be publicly disclosing more information about the filter and its very exciting characteristics shortly. The filter we are purchasing from the supplier is a very, very small part of their overall company, so it is just taking some time to finalize the contract, but as I noted above, I think we should have this completed very soon.

JN: That's fantastic. How quickly can you manufacture product once an agreement is in place?

HS: We have enough filters and tobacco to immediately supply initial demand expected in Europe and Australia. That said, it will be at least a month, perhaps a little more, for product to reach additional counties.

JN: And are those distribution agreements already in place for the rest of Europe?

HS: For some the answer is yes, for others we will need to have product samples made and tested before receiving a purchase order. Fortunately, our European manufacturing partner will be shipping finished cigarettes to each new country in Europe where we launch MAGIC. In the meantime, we are moving forward with a global strategy and I point investors to our press release last week on the receipt of an initial purchase order from our Australian tobacco distribution partner, Quay Tobacco, for both MAGIC and RED SUN in Australia. This was our first sale of product to the Asia-Pacific market.

JN: Let's move on to BRANDA and the MRTP application you filed at the end of 2015. Any feedback so far from the FDA?

HS: Nothing since our face-to-face meeting in January 2016. This was a pretty exciting meeting for the company. The FDA had 22 staff members at the meeting and another 20 attended by phone. I am very pleased with the FDA's prompt attention to our MRTP application. The agency has formally acknowledged its receipt of the application and we are now under review as potentially the world’s first and only modified risk tobacco product.

JN: What are you expecting in terms of timeframe for a response? The initial face-to-face meeting took place so quickly that one could interpret the FDA is moving quickly on this application.

HS: Well, there is no official “fast track” for MRTP applications, but we are encouraged that: 1), FDA has funded dozens of scientific clinical trials using our cigarettes and participated in the design of our SPECTRUM cigarettes, and 2) thus far, there haven’t been any negative comments from the agency at all. According to Section 911 of the FD&C Act, final review and action by the FDA must take place within 360 days of receipt of the application, so we are very optimistic that the process will go smoothly for the company and we expect to have a decision by year end. We will do everything we can to assist the agency in this process.

JN: So speaking of SPECTRUM, there was a 4.95 million order late last year, and I recently just noticed that a Phase 3 study with SPECTRUM at the University of Pittsburgh just got underway. Will this study generate any revenues to 22nd Century?

HS: These high-profile clinical studies always seem to generate still more studies and since we are the only company in the world able to make very low nicotine cigarettes, that will likely lead to additional SPECTRUM orders.

JN: I read through all the SPECTRUM abstracts presented at the Annual Meeting of the Society for Research on Nicotine & Tobacco (SRNT) last month. Most of them read positively for SPECTRUM and the concept of very low nicotine cigarettes helping to reduce cravings. When do you think we will see data from the latest Phase 3 study, and what are you expecting for the outcome?

HS: As you can imagine, Dr. Dorothy Hatsukami’s Phase 3 scientific clinical study using our SPECTRUM cigarettes is very interesting to us. She is enrolling three arms: one group will smoke their normal nicotine level cigarettes, another group will gradually reduce nicotine levels over time by smoking SPECTRUM cigarettes with progressively lower levels of nicotine, and the final group will go immediately to the company’s proprietary Very Low Nicotine cigarettes. I am not going to take a position on whether the group smoking our SPECTRUM cigarettes versus our Very Low Nicotine cigarettes will see better results, but either way, it will benefit 22nd Century Group since both products are our company’s exclusive products. We had some fantastic results that were just recently published in The New England Journal of Medicine (NEJM) from a separate Phase 3 scientific clinical trial, so we are confident in the product and what it is designed to do.

JN: Any update on RED SUN in the U.S.?

HS: The product is on the market at over 600 retail outlets in the U.S. We have undertaken a grass-roots type marketing campaign with the product. The users of RED SUN are truly the best ones to help us market the product, so we are being creative with the promotion of the product. Our “EXTREME NICOTINE” campaign has captured a great deal of attention and has differentiated the product from all the mainstream brands. –So far, it has been fun to watch the product grow and to see consumer interest and momentum build.

JN: I like to look at the success you had when you were the VP and Marketing Director at Santa Fe, before that company was acquired by R.J. Reynolds for $356 million in 2002, and American Spirit grew to approximately $150 million in sales. Is that the best way to look at RED SUN, at least in the U.S.?

HS: Well, I think you are correct and I think American Spirit smokers have already proven themselves to be an excellent target for our marketing efforts. American Spirit smokers are very receptive to the premium, ultra-high quality image that we are conveying for our RED SUN product. Independent-minded smokers who enjoy the satisfaction of a relatively high nicotine cigarette are very receptive to the brand. As the product becomes better known in opinion-leading markets across the country, I think we will do quite well.

JN: Anything else you think investors should be focusing on over the next few months?

HS: We are continuing to have conversations with potential partners around X-22, our prescription-grade Very Low Nicotine cigarette designed to actually help people to quit smoking. Smoking cessation products eclipsed $3 billion in total revenues last year. That includes OTC products like nicotine gums, patches, and lozenges; and prescription products like Pfizer's Chantix, which logged more than $650 million in sales last year. We think X-22 has some very unique characteristics that make our product far more desirable and potentially superior -- in terms of efficacy-- to Chantix. Over 50% of all smokers in the U.S. attempt to quit on a regular basis, but only 2-5% will succeed in a given year. This market is wide open for a product like X-22, or BRAND-A, or even BRAND-B, which is our high nicotine, low tar -- low tar-to-nicotine ratio -- cigarette. Indeed, the future is bright for 22nd Century Group. Stay tuned!

JN: Thank you, Henry!

HS: Anytime, thank you, Jason!

Some Final Thoughts on Valuation

I think 22nd Century Group has tremendous upside over the next several years. A product like BRAND A is very interesting in the hands of the industry's major players like Altria, Reynolds American, and Lorillard, looking to hold onto market share and stay on top. If approved, BRAND A would be the first MRTP on the market and the industry’s biggest players might like having that niche in their pocket. It is also potentially very interesting to tertiary players like Imperial Tobacco, British American Tobacco, and Japan Tobacco looking to gain share in the U.S. with a disruptive technology.

If RED SUN follows the path of its distant relative, American Spirt, revenues could be up ten-fold in the next few years. If BRAND A is approved and captures just 10% of the market from e-cigarettes, it too is a $150 million product. If 1% of the roughly 60 million Americans looking to quit try BRAND A to help reduce cravings, it is a multi-billion dollar product. Recall, 1% of the tobacco cigarette market share in the U.S. is approximately $750 million retail dollars!

In the meantime, we can use the aforementioned industry leaders to try to get a sense of what 22nd Century Group is worth today. 22nd Century (XXII) trades with a market capitalization of only $60 million. As noted above, the company put out guidance expecting revenues in 2016 of at least $12 million. That equates to an EV-to-EBITDA ratio of 5x, cheaper than Altria at 6.2x, Reynolds at 5.7x, and BAT at 5.6x, and this includes no contribution from BRAND A and RED SUN tracking at less than 5% of what I ultimately believe are the products peak sales. The launch of MAGIC only just took place, and resolution of the contractual issue relating to the new filter discussed above should allow expansion around Europe and elsewhere in the world during the second half of the year.

Quite simply, I think investors can buy 22nd Century Group today and pay essentially fair-value for a commercial business at its infancy. Investors almost never have the opportunity to pay fair value for a biotech company on the verge of a blockbuster product approval. That being said, at its heart, 22nd Century Group is a plant biotechnology company, with proprietary technology protected by over 200 issued patents and 50 pending applications. The company's expertise in transcription factors and gene regulation allows for the production of varying levels of nicotine in tobacco. This is the technology behind RED SUN, MAGIC, BRAND A, BRAND B, and X-22, and I believe it will ultimately prove far more valuable than the sales these products are generating today.


Certain statements contained in this interview may be “forward-looking statements” within the meaning of the Securities Litigation Reform Act of 1995. They are generally identified by words such as “believes,” “may,” “expects,” “anticipates,” “should” and similar expressions. Readers should not place undue reliance on such forward-looking statements, which are based upon the Company’s beliefs and assumptions. The Company’s actual results could differ materially due to risk factors and other items described in more detail in the “Risk Factors” section of the Company’s Annual Reports and MD&A filed with the United States Securities and Exchange Commission. Subsequent events and developments may cause these forward-looking statements to change. The Company specifically disclaims any obligation or intention to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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Author Disclosure: I am long XXII common stock


  1. I am also long on this stock. They have an admirable mission to reduce the harm in smoking. My sincere prayer and belief is that XXII executes on the mission.

  2. XXII has an admirable mission that I believe they will execute on; to reduce the harm in smoking. I am bullish regarding XXII!