In the continuing battle between “pharma-tobacco” companies, Star Scientific, Inc. (Nasdaq: CIGX) took a recent and severe public drubbing in a two-part article at SeekingAlpha.com. On the contrary, 22nd Century Group, Inc. (OTCBB: XXII) seems to be distinguishing itself as the new leader in the “modified risk” tobacco space.
In brief, Star Scientific engages in the development and licensing of tobacco curing technology that prevents the formation of carcinogenic toxins present in tobacco and tobacco smoke, primarily the tobacco-specific nitrosamines (TSNA). It is also involved in the development of very low-TSNA dissolvable smokeless tobacco products.
22nd Century is a biotechnology company that engages in modifying the content of nicotinic alkaloids in the tobacco plant through genetic engineering and plant breeding. It is developing smoking cessation products (cigarettes, actually) for smokers who want to quit, in addition to “modified risk tobacco products” (that reduce exposure to smoke toxins compared to conventional cigarettes) for smokers who do not wish to quit.
Both companies are pursuing promising pharmaceutical angles in the enormously lucrative multibillion-dollar tobacco industry. Both companies trumpet the value of their intellectual property; however, while two of Star’s key patents are in dispute with RJ Reynolds, 22nd Century owns or controls 98 issued patents in 79 countries. Both companies have annual sales of about $1 million; however, Star lost more than $28 million in 2010, 22nd Century’s burn rate is less than $1.5 million.
Considering these comparisons – and the fact that XXII’s $35 million market cap is nearly 20 times LESS than Star’s $600 million valuation – it is apparent that 22nd Century stock has plenty of room to run.
Since the company’s OTCBB appearance in January, shares of 22nd Century Group have chugged along on a fairly even keel. (Forthcoming results of the company’s June 2011 IND filing and Fast Track request for its X-22 smoking cessation product have the very real potential to boost the stock considerably.) . Star Scientific shareholders, on the other hand, have been subjected to an exercise in sheer volatility over the last two years, the stock ranging from $5.00 to $0.50 to $4.00 in fits and spurts that give risk managers nightmares.
And it all apparently comes down to who is managing each company and how they run their businesses. Too much hype creates extreme volatility. Add to that a murky background for the CEO and it’s a recipe for price swings which the most careful stop- loss artist can’t anticipate, long or short.
In this latest episode, the SeekingAlpha writer unpeeled layer upon layer of Star Scientific CEO Jonnie Williams’ history as a wheeler-dealer of public companies, including a recitation of SEC sanctions and companies gone bust while — or shortly after — he was at the helm, and William’s apparent knack for often walking away green, while other investors bit the dust. The article is not by any means a useful analysis of the medical merits of Star’s CigRx nutraceutical, which may or may not be very useful, but it does illustrate how a company can ignite the fires of investor contempt by being too hype-ridden. It should be noted that this attack on Star came from a source with massive short positions and strong buy-side puts.
The SeekingAlpha piece notes that, for a long period, Star hyped its stock based on a lawsuit against Big Tobacco, claiming they’d infringed Star’s tobacco processing patent. Damages were supposed to be in the billions. The back and forth of case decisions lent to the stock’s volatility. Lately, Star has been touting one of its products as an anti-inflammatory and a cure for Alzheimer’s disease — all this from a company which apparently invests very little into medical research. But, not to be too hard on Star, some or all of its claims could eventually prove true. No matter. The point is that there’s a credible way to present things… and a way that’s simply not.
Contrast all of this with 22nd Century, its management, and its promotional style. The company plays a ‘steady as she goes’ theme, not over-hyping its genetically engineered “very low nicotine” tobacco… even though the product has the world’s lowest nicotine content (less than 0.35 mg/cigarette; 97% less nicotine than the tobacco in Marlboro® Gold.) Indeed, 22nd Century’s technology is unparalleled.
Reportedly, former FDA Commissioner Dr. David Kessler recommends that the FDA mandate that all brands sold in the US contain no more than 1.0 mg nicotine/cigarette. If this standard is in fact adopted, 22nd Century will have a field day as Big Tobacco lines up to license the company’s “very low nicotine” technology.
Management of 22nd Century is also a lot less colorful than Star’s, featuring Harvard MBA and PhD types, including one in biology. So, for the investor looking to avoid the emotional roller coaster and perhaps find more predictable value, 22nd Century shares seem to hold far better promise than Star’s. In fact, 22nd Century was recently selected to participate in a five-year government contract to supply research cigarettes to a department of the National Institute of Health; it seems public health officials think the company is definitely on to something. Stay tuned for results of the company’s pending Phase IIB clinical trial.
A newly public company with an enviable patent portfolio, an important government contract, and a market cap of only $35MM; it is not hard to understand the rationale behind Rodman & Renshaw’s $140MM 12-month XXII price target. Indeed, given Star’s lofty market cap, it seems XXII has far greater potential.