Update: As of 02/03/2016, 11pm EST, shares of 22nd Century Group Inc (NYSEMKT:XXII) are down by 3.33% with more than 470K shares exchanging hands. It looks like a bounce back is imminent.

Based upon the latest data from the Centers for Disease Control and Prevention, the number of adult smokers in the United States has fallen from 42 percent to about 17 percent in the past 50 years.  Declining cigarette users has led to soft volume trends for tobacco companies, industry consolidation and increased focus on alternative products to restore long-term corporate growth.  Just a few examples of activity in recent years include the $27.4 billion dollar merger of Reynolds American (NYSE: RAI) and Lorillard; Altria Group (NYSE:MO) subsidiary Nu Mark acquiring e-cig maker Green Smoke for $110 million; Imperial Tobacco paying $7.1 billion for blu e-cig, several cigarette brands and other assets as part of the Reynolds/Lorillard merger; and Japan Tobacco, the largest cigarette maker in Asia, buying non-U.S. rights to Reynolds’ premium Natural American Spirit brand for about $5 billion.

Still, the industry remains fertile for more transactions and it seems likely that an upcoming move could revolve around the U.S. Food and Drug Administration issuing its first order authorizing the marketing a “modified risk tobacco product” (MRTP).  The MRTP designation falls under the Family Smoking Prevention and Tobacco Control Act of 2009.  The Tobacco Control Act laid the hammer on cigarette makers, putting stringent restrictions on advertising and promotion, while leading to elimination of terms such as “light” and “ultra light” in describing tobacco products.  The MRTP guidance was implemented to ensure the authenticity of any claims that a tobacco product has reduced harm or risk of tobacco related disease, as a matter of protecting public health.  A MRTP designation is only for a specific product, not a class of products, such as snus or e-cigarettes.

The FDA used its authority under the Act in August to send warning letters to Imperial Brands subsidiary ITG Brands, Reynolds’ unit Santa Fe Natural Tobacco Company and Nat Sherman maker Sherman’s 1400 Broadway, admonishing the companies for labeling their products as “natural” or “additive free.”   The FDA views these type of words as implying to consumers that the tobacco products pose fewer health risks than other products, descriptions that must be backed by scientific fact and garner the approval of the FDA as a MRTP “before they can be legally introduced as such into interstate commerce.”

Being that the FDA has yet to designate any type of tobacco product as a MRTP and the obvious desire by companies to differentiate their products, there is clear value to a product receiving the labeling authorization.

The two companies leading the charge to get a product approved as a MRTP are Stockholm-based Swedish Match (STO: SWMA) and Clarence, NY-based 22nd Century Group (NYSE MKT: XXII).  These are two very different companies, separated by much more than their market capitalization (Swedish Match: $58.1 billion, 22nd Century: $87 million).  Swedish Match, which owns chewing tobacco brand Red Man, Longhorn moist snuff, General snus, White Owl cigars, Cricket lighters and more, doesn’t make cigarettes.  The company is seeking MRTP determinations for several of its snus products.  Snus is a finely ground smokeless tobacco packaged in individual packets that are tucked between the lip and gums.

22nd Century Group is a plant biotechnology company that uses proprietary genetic engineering processes to regulate the level of nicotine and other nicotinic alkaloids in the tobacco plant.  The IP is protected by more than 200 patents.  The result of this technology is tobacco products with a wide range of nicotine levels, spanning from very high levels to those that contain up to 97 percent less nicotine than conventional tobacco without altering taste or aroma.  The company sells its Red Sun extreme nicotine cigarettes in the U.S., Magic brand VLN (very low nicotine) cigarettes in Europe, and supplies its Spectrum cigarettes – which contain various nicotine levels – to the National Institute on Drug Abuse (a unit of the National Institutes of Health) for research purposes through an agreement with RTI International.

Since establishing the regulatory framework for MRTPs in 2009, all applications were rejected until Swedish Match North America’s application was accepted by the FDA for review in 2014.  The company is going back-and-forth trying to persuade the FDA to change labeling on certain of its snus products to remove some risk warnings with respect to possible diseases and conditions.  In April 2015, the FDA denied the request for modifying risk labeling, but the dialogue continues.  Swedish Match has offered a label change for certain products removing, “This product is not a safe alternative to cigarettes,” and replacing it with, “Warning: No tobacco product is safe, but this product presents substantially lower risks to health than cigarettes.”

Used for decades, snus is the most popular tobacco product in Sweden, with most experts agreeing that it is less harmful than conventional cigarettes.  Lending to this idea is data showing that as smoking rates have fallen in Sweden, so have rates of tobacco-related diseases, such as lung cancer, COPD and heart disease.  While it may be less risky that cigarettes or snuff, others contest that doesn’t mean snus is not without it dangers, including a higher risk of pancreatic cancer.

The FDA has yet to be convinced on many of the changes Swedish Match wishes.  In November 2015, though, the FDA authorized the marketing of eight snus products of Swedish Match under the General brand through the premarket tobacco application (PMTA) pathway.  With acceptance through the PMTA pathway, the FDA’s “rigorous scientific review” concluded that the snus products for which Swedish Match presented data on “would result in a low likelihood of new initiation, delayed cessation or relapse” and “likely provide less toxic options if current adult smokeless tobacco users used them exclusively.”

However, the FDA was clear to note the distinction between PMTA and MRTP, stating that allowing the marketing of new products into U.S. markets, “does not mean that they are safe or ‘FDA approved.’”  Swedish Match (or any other company introducing a new product) still must get a separate MRTP authorization in order to make any claims of reduced exposure or risk.

22nd Century Group jumped into the MRTP race in December, with its wholly owned subsidiary, Goodrich Tobacco Company, submitting a MRTP application for 22nd Century’s “Brand A” VLN cigarettes to be commercialized in the U.S.  According to 22nd Century, they are requesting that packaging and marketing of the new cigarettes be allowed to disclose to consumers that there is reduced exposure to nicotine in the cigarettes.  The FDA, an organization that is not exactly known for its speed, contacted 22nd Century and organized a meeting within three weeks of the application submission to discuss the MRTP application.  42 FDA staff members attended the meeting either in person or via telephone, an arguably large number of attendees, which could be interpreted as the FDA’s interest in the VLN cigarettes.

Dubbed the “world’s lowest nicotine cigarettes,” Brand A cigarettes contain less than 0.6 mg nicotine per cigarette and less that 0.05 mg nicotine yield per cigarette, equating to at least 95 percent less nicotine per cigarette to popular brands like Marlboro, Camel, American Spirit and more.

The FDA does not have the authority to ban cigarettes or mandate the elimination of nicotine from them, but it does have the power to restrict levels.  Former FDA Commissioner Dr. David Kessler is an advocate for this action, calling upon the FDA to reduce nicotine levels in cigarettes and the yield to non-addictive levels, describing such a move as “the ultimate harm reduction strategy.”

In making any decision on 22nd Century’s MRTP application for Brand A, the FDA is bound to examining the data.  In 22nd Century’s favor, the cigarettes have been extensively studied to lend scientific support.  Data has been collected from clinical trials, millions of lower-nicotine cigarettes have been researched by the National Institute on Drug Abuse and the VLN products are already sold overseas.  A portion of the clinical research includes an 840-patient double-blind trial that was published in the venerable New England Journal of Medicine in October 2015.  The researchers in the trial concluded that, compared to cigarettes of conventional nicotine content, 22nd Century’s VLN cigarettes were “associated with reductions in smoking, nicotine exposure, and nicotine dependence, with minimal evidence of nicotine withdrawal, compensatory smoking, or serious adverse events.”

The PMTA determination for Swedish Match is a step in the right direction and shows some willingness by the FDA in possibly allowing a more relaxed warning on some labeling, but it’s not there yet.  Since Congress first ordered risks associated with tobacco be put on packaging in 1965, regulators have not budged on easing the verbiage; they have, by large made warnings more emphatic.  Under current deeming regulations, likely to be implemented later this year, the FDA has proposed a new warning effectively letting consumers know that tobacco products contain tobacco-derived nicotine and that nicotine is addictive.

Against the backdrop of new warning labels and the government clamping down of marketing and packaging terms, securing a MRTP could be transformative to any company.  The implications are different for Swedish Match and 22nd Century because of their vastly different sizes and different products.  For Swedish Match, the company could capture more share and further cement its position as a giant in the U.S. snus market.

For 22nd Century, a MRTP should provide at least two-fold benefits.  The company would have a unique opportunity to capture market share.  So-called “premium” brands, such as that of “additive free” Natural American Spirit, are popular in part because they’re perceived as safer due to “organic” tobacco and similar claims.  Natural American Spirit is by no means at the sales volume level of Marlboro or Camel, but it still commanded 1.8 percent of the U.S. market in 2014, while sales reached $658 million.  Getting the FDA’s blessing for a reduced exposure claim, while the Fed flexes its muscles to require new warnings for others, would likely resonate and attract consumers with a new product.  In that same vein, being the only company with a MRTP for a cigarette will surely not go unnoticed by industry competitors, which should open up licensing opportunities at the minimum.  The tobacco industry has been getting reshaped in recent years and it looks like it’s not done yet, as MRTPs have a potential to change the playing field.  It’s just a matter of when the FDA starts giving some green lights.