22nd Century Group Inc. is raising its stake in the hemp/cannabis sector by announcing plans May 13 to acquire privately held GVB Biopharma in a deal valued overall at $55 million.
GVB, founded in 2016 and based in Las Vegas, is one of the largest providers of hemp-derived active ingredients involving CBD products for the pharmaceutical and consumer goods industries worldwide, based on total tonnage.
22nd Century, based in Buffalo, has its cigarette-manufacturing operations in a 62,000-square-foot plant in Mocksville where it has 49 of its 65 employees.
22nd Century is paying for the proposed deal by providing 32.9 million unregistered shares of its stock to GVB, along with assuming $4.5 million of GVB debt.
At $55 million, it is about 20% of 22nd Century’s market capitalization of $268.2 million.
James Mish, 22nd Century’s chief executive, called the deal “a transformational acquisition for 22nd Century that will enable us to rapidly grow our hemp/cannabis franchise.”
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22nd Century gains a 30,000-square-foot hemp ingredient manufacturing facility in central Oregon, a 40,000-square-foot finished product plant in Las Vegas, and an industrial-scale hemp extraction facility in Prineville, Ore. The companies did not disclose the workforce levels at those facilities.
GVB also has offices in the United Kingdom and Brussels.
With GVB projected to have $48 million in fiscal 2022 revenue, it would more than double 22nd Century’s annual revenue, which was at $30.9 million in fiscal 2021.
However, the deal did not spur significant movement in 22nd Century’s share price, which closed up 11 cents to $1.68. The 52-week price range is $1.42 on May 11 to $5.25 on June 7, 2021.
“While heavily dilutive to the existing 22nd Century shareholders, if the projections to be immediately accretive to earnings, then I do not see this as an exceptionally risky transaction,” said Bowman Gray IV, a local independent stockbroker.
22nd Century said GVB’s industry strengths complement its existing hemp/cannabis market presence that includes: cannabinoid receptor science with CannaMetrix; plant research and proprietary genetics through its KeyGene partnership; breeding expertise with Extractas; and cultivation capabilities at Needle Rock Farms.
GVB is a supplier to CBD and cannabinoid brands that include Cookies, Nuleaf and Canaxis Pharma.
“The combination with 22nd Century establishes a global one-of-a-kind asset to serve the rapidly growing hemp/cannabis ingredient market,” Mish said.
“GVB is one of the largest CBD suppliers globally, possessing innovative, vertically integrated cannabinoid product manufacturing technologies driving industry leading scale and cost efficiency.
“GVB represents an opportunity to double our revenue and internalize a comprehensive contract manufacturing and extraction platform, which can be used to directly and exclusively monetize our differentiated and proprietary hemp/cannabis plant genetics and intellectual property,” Mish said.
GVB chief executive Phillip Swindells said being bought by 22nd Century allows for “pairing our production and manufacturing capabilities together with the best hemp/cannabis plant science in the world.”
“Since 2017, we have built a loyal customer base and continue to add new, rapidly growing customers as demand in our industry accelerates. We sold more than 5 billion doses of CBD in 2021.”
GVB has multiple international joint ventures in Europe to co-develop and co-own processing and distribution companies aligned to market needs.
Gray said that 22nd Century is upping its bet on the potential of legislation “to clear the way for hemp/cannabis companies to be able to function as any other.”
If that occurs, Gray said 22nd Century can “situate themselves as a major player in the hemp/cannabis markets, which I believe will be far larger than the market for low-nicotine tobacco products.”
“Given their research work with the University of Virginia and others, this is not a new idea or venture for them.
“It’s just executing on what has been their long-term plan.”
22nd Century status
The proposed deal comes as 22nd Century is in a pilot market for its very low nicotine traditional cigarettes in the Chicago area.
On May 6, 22nd Century reported a larger loss in the first quarter at $9.32 million, compared with $5.06 million a year ago.
22nd Century’s VLN King and VLN Menthol King brands contain up to 95% less nicotine than conventional traditional cigarettes.
Mish said the manufacturer has gained regulatory clearances to launch its very low nicotine tobacco and menthol styled products in nine states: California, Colorado, Florida, Illinois, Minnesota, Mississippi, New York, Rhode Island and Texas.
A Barclays projection that 22nd Century could reach up to $43 million in annual sales “would be good news for its investors,” said David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.
However, Sweanor said the $43 million needs to be put into context given the U.S. traditional cigarette marketplace has about $60 billion in annual sales, according to Goldman Sachs analyst Bonnie Herzog.
“22nd Century would be taking, in Barclay’s optimistic forecast, somewhere in the range of 1/1,500th of the market, with a product that only makes health sense if its customers soon stop using it,” Sweanor said.
Mish said on April 29 that “it expects” to be exempted from the banning of menthol flavorings disclosed April 28 by the Food and Drug Administration.
However, anti-smoking advocates said any such FDA exemption likely would be protested by public-health and anti-tobacco advocates pushing for a total menthol flavoring ban for all tobacco and nicotine products.
The FDA issued an expected proposal to ban menthol flavoring in traditional cigarettes and all non-tobacco flavorings in cigars. The actions had been expected for several weeks by industry analysts and anti-tobacco advocates.
Yet, it remains highly likely that tobacco manufacturers will have years to adapt to a menthol-free industry, if a menthol ban ever takes force amid projected legal challenges.
Mish said the manufacturer’s projection comes from belief that VLN Menthol King will serve a public-health purpose in limiting smokers’ nicotine consumption.
Mish said the menthol styles “are an unmatched tool for helping adult menthol smokers find an off-ramp from nicotine addiction.”