22nd Century Group, Inc. (XXII) is a leading agricultural biotechnology company that develops plant-based solutions for several consumer products, such as cigarettes. The Clarence, N.Y. company uses modern plant breeding technologies to control nicotine biosynthesis and has developed proprietary reduced nicotine content tobacco plants. However, the company has an ISS Governance QualityScore of 1, indicating relatively high governance risk.

On Dec.23, XXII received U.S. FDA authorization to market its VLN King and VLN Menthol King cigarettes as modified risk tobacco products. These cigarettes contain 95% less nicotine than conventional cigarettes. Regarding this, XXII CEO James Wish said, “This is the first, and most likely will be the only, combustible cigarette to ever carry the FDA’s MRTP designation. The FDA’s decision to require the additional headline claim ‘Helps You Smoke Less’ alongside our requested headline claim of ‘95% Less Nicotine’ gives adult smokers a crystal-clear reason to replace their conventional and highly addictive cigarettes with VLN®.” Shares of XXII have climbed 34.1% in price since the FDA approval to close yesterday’s trading session at $2.93.

XXII plans to launch VLN cigarettes commercially with select retail and marketing partners in the U.S. by the end of this quarter. It also plans to expand its product reach to international markets, including the potential licensing of its technology to facilitate a broader industry transition to manufacturing modified cigarettes.

Here is what could shape XXII’s performance in the near term:

Falling Demand

Cigarette sales increased for the first time in 20 years during 2020, with total nicotine consumption in the U.S. increasing 3.4% year-over-year. However, this increase does not reflect a long-term trend. Monthly cigarette sales fell 4.9% in March last year, amid rising prices and new FDA restrictions. E-cigarette sales fell 1.6% over this period.

In September last year, the FDA ordered more than five million e-cigarettes to be taken off the market. Earlier, in April 2021, the FDA announced plans to ban the production of menthol cigarettes and flavored cigars.

Furthermore, on Dec.15, 2021, Congresswoman Mikie Sherril introduced a bipartisan bill, Clarifying Authority Over Nicotine Act of 2021, that will give the FDA the authority to regulate synthetic nicotine products.

Negative Profit Margins

XXII’s 7.49% trailing-12-month gross profit margin is 78.3% lower than the 34.56% industry average. However, its trailing-12-month EBITDA margin and net income margin are negative 79.25% and 82.68%, respectively. Also, the company’s levered free cash flow margin stood at negative 40.31%.

Its trailing-12-month ROE, ROA, and ROTC are negative 38.82%, 28.97%, and 23.65%, respectively. In addition, XXII’s 0.42% asset turnover ratio is 51.4% lower than the 0.87% industry average.

Poor Earnings Growth Prospects

Analysts expect XXII’s revenues to increase 20.1% in its fiscal year 2021, 79.3% in its fiscal 2022 first quarter, and 69.8% in 2022. However, the Street expects the company’s EPS to decline 66.7% in the current quarter, 7.1% in fiscal 2021, and 46.7% in the current year. Because XXII spends a significant proportion of its revenues in advertising, promotion, and SG&A expenses, its bottom line is expected to remain negative until at least 2022.           

POWR Ratings Reflect Bleak Prospects

XXII has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

XXII has an F grade for Value and Quality. The stock’s forward non-GAAP P/E multiple is negative 16.28, which is in sync with the Value grade. In addition, the company’s negative trailing-12-month profit margins justify the Quality grade.

Of 470 stocks in the F-rated Biotech industry, XXII is ranked #460.

In addition to the grades I have highlighted, view XXII ratings for Growth, Sentiment, Stability, and Momentum here.

Bottom Line

XXII’s modified cigarettes might drive the company’s sales significantly in the coming months. However, with high selling, general and administrative expenses, and its reinvestment of profits, the company’s profit margins are expected to remain negative in the near term. Also, with declining demand for cigarettes in the U.S., XXII’s product sales could take a hit over the long term. Countries like New Zealand and the U.K. are taking active steps to ban smoking, and the U.S. could soon follow suit, with the FDA incrementally banning cigarette derivative products. Thus, we think XXII is best avoided now.

How Does 22nd Century Group, Inc. (XXII) Stack Up Against its Peers?

While XXII has an F rating in our proprietary rating system, one might want to consider looking at its industry peers, Vertex Pharmaceuticals Incorporated (VRTX), Amgen Inc. (AMGN), and Sino Biopharmaceutical Limited (SBHMY), which have an A (Strong Buy) rating.

XXII shares were trading at $2.67 per share on Wednesday afternoon, down $0.26 (-8.87%). Year-to-date, XXII has declined -13.59%, versus a 0.18% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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