Tobacco cigarettes are arranged for a photograph. (Photographer: Kiyoshi Ota/Bloomberg)

Tiny Biotech's Tobacco Tinkering Makes It a Rare Winner

(Bloomberg) -- An obscure biotechnology company in western New York with about 80 employees suddenly saw its popularity rise last week after the tobacco industry was shocked by an announcement the federal government was exploring lowering nicotine levels in cigarettes.

That’s because tiny 22nd Century Group Inc. has something that’s suddenly in high demand -- it grows tobacco plants with just 3 percent of the nicotine in typical tobacco plans. As stocks of cigarette giants plunged over the past week, 22nd Century’s shares are up 70 percent. On Friday, they gained 25 percent -- the biggest one-day increase since March 2015.

Producing a cigarette with low levels of nicotine, the addictive stimulant in cigarettes, has been a challenge for the industry since as far back as the 1960s. Large tobacco companies such as Philip Morris International Inc. have tried their hand at it and failed. The Food and Drug Administration has explored the issue for several years, though -- in 2013 it held a listening session where the idea of cutting nicotine levels came up.

Chief Executive Officer Henry Sicignano and a few other 22nd Century employees were at the session.

“There were only three of us there from the company and we were kicking each other under the table and smiling ear to ear,” Sicignano said in an interview.

Tiny Biotech's Tobacco Tinkering Makes It a Rare Winner

Few others have taken notice recently. Until this week, the stock hadn’t risen above $2 a share in the last two years. Even with this week’s rise it has a market valuation of $180 million -- a tiny minnow compared to tobacco company whales like Altria Group Inc. and British American Tobacco Plc.

Previous efforts to make low-nicotine cigarettes failed in part because tobacco varieties developed to meet the goal had lower yields, making them less desirable for farmers. They also tended not to have tastes or smells deemed desirable by industry and consumers. Low-nicotine plants can also attract pests that normal tobacco wouldn’t.

“Nicotine is a natural insecticide, if you will, so the lower the levels of nicotine, the less resistant the plants are to pests,” Sicignano said. That raises growing costs.

Genetic modification has emerged as a shortcut to some of the challenges, said Ramsey Lewis, a biotechnology researcher at North Carolina State University, home to the U.S. repository of tobacco strains. Yet those advances come with drawbacks as well, he said.

“Living things are complex,” he said. “When you produce a lower nicotine variety using a genetics approach, other characteristics of the plant can change the plant, which may be bad for growers or undesirable for the industry.”

22nd Century uses both approaches -- some of its low-nicotine varieties use lab-based genetic modification, while others are bred with traditional techniques. It’s licensed its nicotine-altering technology to British American Tobacco in a deal worth as much as $14 million.

There may be more like it. After the FDA’s announcement last week, the contact 22nd Century has had with the tobacco industry “has moved up tremendously,” Sicignano said.

“It’s definitely a game-changer,” Sicignano said. “It’s very easy to bulk up production and grow low-nicotine tobacco in short order. We’re not out there investing tens of millions of dollars to do that yet, but we’re certainly at the ready.”

The company is developing two products itself, a smoking-cessation cigarette that must go through a strenuous regulatory clearance and a cigarette that could be dubbed “modified risk.” The company also holds more than 200 patents, many which protect its low-nicotine tobacco plants from competition.

Sicignano says the company would “broadly license the technology or tobacco to all of our competitors.” He isn’t keen on a sale.

“We’re a public company so I guess at the end of the day everything’s for sale, but it’s not our intention to go sell ourselves,” he said.