This under-the-radar stock just got a huge freebie from the Biden administration

As the Food and Drug Administration (FDA) reported in June that it was developing a proposal for a new set of standards that would place a hard cap on the level of nicotine allowed in cigarettes to reduce addiction, shares of 22nd Century Band (XXII -1.35%) are booming, increasing by around 16.6% in the last 30 days.

Biotech isn’t a traditional cigarette business, nor is it well-known, but there’s no doubt that Biden administration regulators have created what could become a transformative opportunity for the company. Here’s why.

He’s already well ahead of the regulatory curve

In the FDA announcement, regulators justified the need for new rules by pointing to research showing that many people want to quit but can’t due (obviously) to the highly addictive nature of nicotine. The reasoning is that if cigarettes had significantly lower levels of nicotine, they wouldn’t have as much of a hold on people.

Needless to say, such limits would likely devastate cigarette manufacturers like Altria and Philip Morris. But in theory, cigarette makers could voluntarily reduce nicotine levels in their products to comply with the proposed rules, assuming they are ever clarified, approved and enforced. Such a pivot would involve significant costs and would also disrupt the competitive landscape of the cigarette industry, likely breaking the stranglehold of the current generation of dominant players.

This is where the 22nd century comes in. As a plant genetic biotech, his expertise lies in using genetic engineering to tailor the performance of psychoactive chemicals in commercial crops like cannabis, hops, and yes, tobacco. And in late 2021, the FDA gave the company the green light to market its very low nicotine (VLN) cigarettes for the express purpose of reducing the daily consumption of people trying to quit smoking. With 95% less nicotine than a standard cigarette, the 22nd Century product already complies with the proposed cap.

So when the old cigarette companies scramble to adapt their products and spend a lot of money, the biotech could sell its boxes by hand. It does indeed have a massive lead in a race for a soon to be massive new market that competitors haven’t even begun to prepare to tackle yet. According to management, the total addressable market could reach $717 billion per year, assuming the entire global cigarette market is addressable with a low nicotine input.

The regulation gift has not yet started giving

Sales of 22nd Century’s VLN products are just beginning, and its last 12-month revenue is only about $33.2 million. And since the proposed rule won’t even be debated until 2023, it likely won’t be approved and implemented to be binding until around 2027, if it ever is. In the short term, the company is rolling out sales in several pilot locations before attempting to expand nationwide, so it may be some time before revenue growth resumes.

Yet 22nd Century is a biotech, not a dedicated cigarette manufacturer and marketer like its bigger competitors. Thanks to the proposed regulations, however, it will never need to be a global cigarette seller for it to grow hugely. Management is already tackling the topic of licensing its reduced-nicotine tobacco cultivars and nicotine-reduction technologies to companies that need help complying with the proposed regulations.

If competitors bite and pay for the licenses, it will mean taking a (potentially quite large) slice of their revenue without having to bother building a business organization on the same scale as their larger competitors, let alone growing or tobacco processing. And when it comes to freebies from regulators, there’s nothing sweeter than the prospect of getting paid to help competitors modify their products to be more like yours.

Alex Carchidi has no position in the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.

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