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Why a Clarence company is taking the high out of marijuana

David Robinson

A fledgling Clarence company thinks it has discovered a way to turn a closely regulated cousin of the marijuana plant into the next big agricultural crop.

It is a most unlikely pairing, pitting 22nd Century Group, a money-losing cigarette maker that shares a nondescript Main Street office with a dentist, potentially against some of the nation's giant corporations from Big Tobacco and Big Pharma.

It is a David vs. Goliath battle that 22nd Century executives think they can win, either by successfully turning its discovery into a blockbuster commercial product, or through a lucrative partnership or, possibly, an acquisition, with one of the corporate giants it now counts as a rival.

It all centers around industrial hemp, the plant that was used to produce the paper both the Constitution and the Declaration of Independence were written on. A plant known for its strong fibers that, in days past, produced durable rope and thousands of other industrial and commercial products.

Yet industrial hemp has a big problem. It is a close cousin of the marijuana plant, and while its leaves contain far less of the chemical that gives marijuana its druglike qualities, it still is considered to be a narcotic under federal law. It's been illegal to grow industrial hemp since the 1940s.

But the rules have started to loosen, and it now is legal to raise industrial hemp as part of pilot programs in more than half of the states, including New York. The key is that the hemp has a THC content of no more than 0.3 percent, compared with 3 percent to 15 percent in marijuana plants. Industrial hemp crops that cross the 0.3 percent threshold have to be destroyed, creating risks for farmers since THC levels can vary.

That variability is what excites Paul Rushton, 22nd Century's vice president for plant biotechnology. He believes 22nd Century, through its partnership with a marijuana breeding and testing lab in Vancouver, has come up with a way to produce industrial hemp plants that have no THC, the main psychoactive element in marijuana.

"We're in a really unique position," Rushton said.

"It's advances like this that can make a difference," he said. "There's so much untapped possibility here."

Jenna Blamowski works in a lab at 22nd. (Mark Mulville/Buffalo News)

For 22nd Century, the appeal of industrial hemp is twofold.

Its market now is small, estimated at more than $500 million, but Rushton thinks that's just a fraction of its potential from new products such as food oil, clothing, building materials and a host of consumer products.

"You start to realize you're right at the inception of an industry," Rushton said. "There are so many things that it might be."

Those products also could get to the market in a relatively short period of time, since they wouldn't be subject to the strict regulatory review that its cousins in the medical marijuana industry face.

And if 22nd Century can get rid of the THC in industrial hemp, Rushton believes its technology can do the same with marijuana, potentially opening the door to research and development work on upwards of 100 different compounds and chemicals found in marijuana plants that could be used for medical purposes.

"This is just the beginning, and this is just our initial contribution to the industry," Rushton said. "We've shown that we can do it."

What 22nd Century and its Canadian partner, Anandia Labs, have shown is that it can produce industrial hemp plants without THC. But more work needs to be done to refine the plants so that they are tailored to climates in particular regions and have added characteristics that make them resistant to drought and disease. Each of those steps will require breeding new generations of plants and that will take time.

Rushton estimates that breeders can produce two generations of industrial hemp plants each year. 22nd Century is working with researchers from the University of Virginia to plant up to 40 acres of industrial hemp as part of the state's industrial hemp pilot project.

Even 22nd Century CEO Henry Sicignano and Rushton can't agree on how fast industrial hemp can be turned into viable commercial products.

"I'm hoping for 2017, and Paul want's to hedge his bet and he's talking about 2018," Sicignano said.

Either way, it won't be easy. While 22nd Century believes it will be able to produce a commercially viable strain of industrial hemp without any THC, there already are available strains with very low levels of THC.

Federal laws make research in the United States tricky. To get seeds to its pilot program in Virginia, Rushton said 22nd Century may have to ship them through Canada to get around more stringent rules on transporting the seeds between states.

And then there is 22nd Century's own financial challenges. The company has never turned a profit, posting losses of more than $11 million during each of the last two years. Since 2012, 22nd Century has lost more than $71 million, even as its sales have grown from a little more than $500,000 in 2014 to more than $12 million last year.

The company's rising revenues stem from its tobacco products, which are based on its technology that allows it to manipulate the level of nicotine in tobacco. That has led 22nd Century to develop its own brands of cigarettes, with varying degrees of nicotine.

Paul Rushton, 22nd Century vice president, holds a tobacco plant at the company's laboratory. (Mark Mulville/Buffalo News)

22nd Century makes its own cigarettes at a factory it owns in North Carolina, but its cigarette sales are nowhere near enough to run the plant at full capacity. As a result, the factory still loses money, although Sicignano said he believes cigarette sales will increase sufficiently this year to allow the factory to break even, after cost cutting.

The company also is working on cigarette products with very low levels of nicotine that it hopes to be able to sell as a product aimed at helping people stop smoking. Sicignano has come to believe that 22nd Century's future hinges on its smoking cessation products and its hemp and marijuana products. The company is cutting back on its cigarette marketing to spend more on efforts to gain regulatory approval for its very low nicotine cigarettes.

But 22nd Century's financial leash is relatively short. The company had $13.5 million in cash at the end of last year, after selling additional shares of its stock to investors. That should be enough to keep the company running through May 2018, said John Brodfuehrer, the company's chief financial officer.

With resources tight, some 22nd Century investors have speculated that the company could look for a partner or look to be acquired by a competitor with much deeper pockets.

But with 22nd Century's stock trading for around $1.25 per share, its $112 million market capitalization wouldn't lead to a windfall for investors.

"I have no intention of selling the whole company when we're trading at such a low market cap," Sicignano said.

So 22nd Century will keep plugging along, hoping to succeed on its shoestring budget in an industry that is just waking up after a 70-year nap.

"It's exciting times," Rushton said. "Who knows where we'll be at this time next year."

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