x min read

What's Behind The 22nd Century Group Inc (NYSEMKT:XXII) Upside?

What's Behind The 22nd Century Group Inc (NYSEMKT:XXII) Upside?
Written by
Alex Carlson
Published on
October 2, 2016
Copy URL
Share on LinkedIn
Share on Reddit
Share on Twitter/X
Share on Facebook
InsidrFinancial

When a company spikes more than 25% on nothing more than a press release alluding to the size of a potential market, it can often be a red light. That, or a reason to sit up and take notice. 22nd Century Group Inc (NYSEMKT:XXII) just did exactly that, and the company looks set to gain further before this week draws to a close. The question is, what is driving these gains? It can't be solely driven by the most recent press release (although we can't write this off completely). As such, there must be something else, perhaps behind the scenes, that has markets excited for near term potential. If this is the case, there's only one real candidate, and that is the potential near term approval of 22nd's lead low-nicotine marketing application, X-22.Here's what we know, and what it means.First, a quick introduction to the company. 22nd Century focuses on the development and sale of niche tobacco products. It is also attempting to negotiate a shift into the cannabis space, but right now, tobacco is its primary focus. Specifically, it sells different brands of cigarettes with varying levels of nicotine – some lower than standard brands, some higher than standard brands. It's lead pharmaceutical tobacco brand is X-22, and this is the brand around which the current interest resides. Basically, the company could sell its brand now as it wished into the open market. However, it would not be able to label it (and in turn to market it) as a very low nicotine product. Further, physicians will be able to prescribe these cigarettes as a smoking cessation option to patients.By way of what's called a Modified Risk Tobacco Product (MRTP) application, which the company submitted to the FDA on December 31, 2015, 22nd Century is trying to turn these two aforementioned points in its favor.So the company submitted the application back at the end of last year, and a couple of weeks later, sat down with the FDA to discuss how to move forward. A low nicotine application has never been approved before, and this is why investors are getting excited about the application. If 22nd can get the marketing application authorized, it will be the first company to get a product in the hands of physicians, which can legally be referred to as a low nicotine smoking cessation tobacco product.So the question now becomes, is there a demand for this product? This is where the latest press release comes in. Again, we are going to take this with a pinch of salt. Surveys like this are notoriously inaccurate (not from a numerical perspective, but from their reflection of real life). However, the numbers do give some idea of a generalized market. We are not going to go into them into much detail, but those interested can take a look here.The headline is this: 90% of physicians said that they would consider prescribing X-22, and a similar proportion of smokers said that X-22 would be their top or first choice to help them quit smoking.So there's a potential market – now the real question: what are the chances of approval?With very little precedent, answering this one is tough. What we can say, however, is that the body of evidence that 22nd century has put together seems to confirm the legitimacy of its request, and that based on that, there doesn’t look to be any obvious reason why the agency won't give the company a green light.Which brings us to a potential stumbling block: cash, or more specifically, lack thereof.22nd Century has practically nothing in the bank – $2.8 million cash at June 30 plus the $5 million proceeds of an RDO. It will probably be enough to get by for the next few quarters, but far from sufficient to fund a marketing campaign for a healthcare product – even if it's the only one in the market.As such, we see dilution factoring in heavily here.What's the takeaway? That the company is gaining strength, and we think this might be a sign that the FDA is close to a decision. This decision looks like it might be a good one for the company, but 22nd Century needs to raise to fund commercialization. This raise is going to be substantial, and will likely kill off any value near term. Shareholders will need to look to a successful marketing execution in the pharmacy space (a big ask, for any company) for a return realization on this value.Bottom line – risky, long term, but potentially rewarding for those of a sturdy disposition.Subscribe below for updates on this and other near term catalysts in healthcare!Disclosure: We have no position in XXII and have not been compensated for this article.

Discover Hidden Gems

Don't miss the next big opportunity. Subscribe for timely alerts on potential market movers.